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Video will be the online advertising engine

advertising, hardware By December 13, 2010 7 Comments

Last week, Akamai quietly rerouted loads of its client’s traffic to deflect Wikileaks related attacks. The company, based in Cambridge (Massachusetts), had a surfeit of busy days fighting massive DDoS (Distributed Denial of Service) attacks. These raids were directed at companies seen as too complacent with the US government (the so-called “Wikichickens”, as coined by the financial site Breaking Views). Akamai’s countermeasures involved quickly moving data from one server to another or, when the origin of a DDoS was detected, rerouting the flood of aggressive requests to decoy URLs.

Akamai Technologies Inc. is specialized in providing distributed computing platforms called CDN (Content Distribution Networks). Its business is mainly to reduce internet latency and to offload its customers’ servers. As its president David Kenny told me last week, Akamai runs on three main business drivers: Cloud Computing, e-commerce, and video delivery (with the associated advertising).
The first driver is very straightforward: as applications move away from the desktop, users need to feel they get about the same response time from the cloud as they do from their hard drive. The same is true for infrastructure-as-a service. All is built around the idea of elasticity: servers, storage capacity and networks dynamically adjusting to demand.
The second component of Akamai’s business stems from the need for e-commerce sites’ availability. On Thanksgiving, Akamai said it saved about $50m in sales for its e-commerce clients who came under a series of cyber attacks. On a routine basis, the technology company stores thousands of videos and other bandwidth intensive items on its servers.
The third pillar is the biggest, and the more challenging, not just for Akamai but for the commercial internet as a whole: the growth of video, and of its monetization, will become more bandwidth hungry as advertising migrates from contextual to behavioral.

A couple of weeks ago, David Kenny was in Paris at a gathering hosted by Weborama, the European specialist of behavioral targeting (described on a previous Monday Note How the Web talks to us). He presented stunning projections for the growth of internet video.
Here are the key numbers :
Global IP traffic will quadruple between 2009 to 2014 as the number of internet users will grow from 1.7 billion today to 4 billion in 2020.
–  In 2014, the Internet will be four times larger than it was in 2009. By year-end 2014, the equivalent of 12 billion DVDs will cross the Internet each month.
– It would take over two years to watch the amount of video that will cross global IP networks every second in 2014.

Traffic evolution goes like this :

Let’s pause for a moment and look at the technical side. Akamai relies on a distributed infrastructure as opposed to a centralized one. It operates 77,000 servers, which is comparatively small to Google’s infrastructure (between 1m and 1.5m servers on 30 data centers). The difference is that Akamai’s strategy is to get as close as possible to the user thanks to agreements with local Internet Service Providers. There are 12,000 ISPs in the world, and Akamai says it has deals with the top 1,000. This results in multiple storage and caching capabilities in more the 700 biggest cities in the world.

This works for a page of the New York Times or for a popular iPhone application (Apple, like Facebook are big Akamai clients). In Paris, Cairo or Manilla, the first customer who requests an item gets it from the company — whether it is from NY Times or Apple’s servers — and also causes the page or the app to be “cached” by the ISP. This ISP could rely on storage leased from a university or a third party hosting facility. From there, the next user gets its content in a blink without triggering a much slower transcontinental request. That’s how distributed infrastructure works. Of course, companies such as Akamai have developed powerful algorithms to determine which pages, services, applications or video streams are the most likely to be much in demand at a given moment, and to adjust storage and network capacities accordingly.

Now, let’s look at the money side. What does advertising have to do with bandwidth issues? The answer is: behavioral vs. contextualization. Ads will shift from a delivery based on context (I’m watching a home improvement video, I’m getting Ikea ads), to targeted ads (regardless of what I’m watching, I’ve been spotted as a potential motorcycle buyer and I’m getting Harley Davidson ads). Such ads could be in the usual pre-roll format (15 sec before the start of the video) or inserted into the video or the stream, like in this example provided by Akamai.

As online advertising spending doubles over the next ten years, video is likely to capture a large chunk of it. It will require a increasing amount of technology, both to refine the behavioral / targeting component, and to deliver it in real-time to each individually targeted customer. This is quite a challenge for news media company. On one hand, they are well-placed to produce high value contents, on the other, they will have to learn how to pick up the right partner to address the new monetization complexities.


Expanding Into New Territories

advertising, newspapers, online publishing By October 24, 2010 Tags: 27 Comments

In defining business strategies for modern medias such as online newspapers, the most difficult part is finding the right combination of revenue streams. Advertising, pay-per-view, flat fee… All are part of the new spectrum media companies now have to deal with.

The gamut looks like this:

As we can see, newspapers mostly consist of one product line, confined to the mainstream, value-added news category. By going digital, this segment is likely to lose most of its value (expect a 60% meltdown as expressed in revenue per reader). Therefore, for these companies, it becomes critical to expand into new territories already taken over by other players. For instance, big media outlets endowed with strong brands should go into commodity news and participatory/social contents. This doesn’t mean a frontal attack on Facebook or Twitter, obviously; instead, the new reality dictates using and monetizing through them (see last week’s Monday Note on Facebook monetization).

Ancillary publishing should also be considered a natural expansion: news outlets retain large editorial staffs that could be harnessed to produce high value digital books (see this earlier Monday Note on Profitable Long Form Journalism). The “Events” item, on the list/graph above, is more questionable, but it remains a significant source of potential income tied to the brand’s notoriety. I left aside the classifieds business: except for a few media groups (Schibsted all over Europe or Le Figaro Group in France) that boarded the train on time, positions are now too entrenched to justify an investment to gain a position in that segment.

Advertising is likely to remain the biggest money maker for the two dominant categories: Commodity/Participatory/Social Media and Mainstream Value-Added. Unfortunately, in its digital form, advertising has run in deflationary mode for the past decade due to flat (at best) CPMs, with huge inventories putting further pressure on prices.

Print doesn’t look great either as investments shift en masse to digital; this reflects the growing imbalance between time spent by users on print and advertising investments in the medium. According to Nielsen Media Research, the Internet now accounts for 38% of time spent but only for 8% of ad spending; newspapers are on a symmetrical trend as they captured 20% of advertising dollars for only 8% of users’ time.


The Facebook Money Machine

advertising, social networks By October 17, 2010 Tags: 51 Comments

An update to this column: According to the Wall Street Journal, any of Facebook’s most popular applications have been transmitting identifying information — in effect, providing access to people’s names and, in some cases, their friends’ names — to dozens of advertising and Internet tracking companies. See here (paywall).

This year, Facebook will make about $1.5bn in advertising revenue. On average, this is about three dollars per registered user, a figure that is significantly higher for the 50% of the social network’s population that logs in at least once a day. How does Facebook achieve such numbers? Last week, we looked at the architecture Facebook is building as a kind of internet overlay. Now, let’s take a closer look at the money side.

If Google is a one-cent-at-a-time advertising machine, Facebook is a one-user-at-a-time engine. The social network is putting the highest possible value on two things: a) user data, b) the social graph, e.g. the connections between users.
For a European or American media, one user in, say, Turkey (23m Facebook users) carries little or no value as far as advertising is concerned. To Facebook, this person’s connections will be the key metric of his/her value. Especially if she is connected to others living outside Turkey. According to Justin Smith from the research firm Inside Facebook, in any given new market, the social network’s membership really takes off once the number of connections to the outside world exceeds domestic-only connections. A Turkish person whose contacts are solely located within the country is less valuable than an educated individual chatting with people abroad; the latter is expected to travel, has a significant purchasing power and carries a serious consumer influence over her network. As a result, Facebook extracts much more value from a remote consumer than any other type of media does.

Advertisers rely on three main strategies on Facebook, as explained by Frederic Colas, chief strategic officer for FullSix Group, a Paris-based interactive agency. The first one is the fan page. The goal is to manage and optimize user engagement with a brand through community management. Numbers are impressive.
Here are the top 15 compiled by Facebakers:

Getting high traffic on a fan pages is still more art than science; interaction volume varies widely. In a recent study (here, in French), FullSix demonstrated that, within a same market segment such as fashion, the number of monthly interactions per 1000 fans will be 4 times more important for H&M (4.3m fans) than for Gap (0.75m fans) and 25 times higher for Victoria’s Secret (8m fans) than RayBan (1.4m fans).
The second approach uses social plugins (such as the “Like” button, recommendations, external login, etc.).
And the third strategy is more like classic advertising campaigns with an unparalleled degree of targeting: Facebook makes possible to combine precise parameters, ranging from location to company name and the precise timing of an ad with a high degree of precision (find the women above 40 who work for IBM, in northern New York state and deliver an ad every Friday between 18:00 and 22:00, for instance). This advertising resource is self-serve, totally automated, and accounts for half of Facebook’s commercial revenue.


The 2010 Media Watch List

advertising, magazines, mobile internet, newspapers, online publishing By January 3, 2010 Tags: , 13 Comments

No predictions, just a few of many hot topics for the newborn year.

Paywalls. 2010 could see a significant number of newspapers jumping into the paid-for option. Among the conditions to be met:

– Grouping around a toll collector. It could be Journalism Online in the US, a big media group in Europe, or even Google — should a truce occur between the search giant and publishers. From the user’s standpoint, the payment intermediary must be friction free, able to operate on any platform (web, mobile) and across brands.
Publishers will have to devise a clever price structure. If a knee-jerk move takes them back to the tired basic-content vs. premium-content duality, they are doomed.
– State-of-the-art web analytics affords much more refined tactics around users, platforms segmentation, etc. In addition, a paid-for system must be able to deal with many sources of income, such as monthly subscriptions, pay by-the-click, metering system based on downloads, time spent, etc.
– Publishers must act in concert. In every market, the biggest players will have to carefully coordinate their move to paid-models: everybody must jump at the same time. This is easier said than done: there is always the risk a rogue player will “cheat”, that is break the pact in order to secure a better market position. Also, too much “coordination” could encourage a disgruntled competitor to sue on anti-trust grounds.Daily newspapers shifting to periodicals. How many dailies in the world will shift from seven or five issues a week to three or two? Undoubtedly, many. This is a better trend than it sounds. For breaking news, print is no longer relevant, but it will remain the medium of choice for long-form pieces. Newspapers publishing a few times a week will gain by becoming more magazine-like in their news coverage; they’ll save their story-breaking capabilities for web versions. In this regard, the mobile web will soon become bigger than the original, PC-based variant.
The “instant web” such as Twitter and its offspring will thrive in 2010. The likeliest offshoot is video-twittering as pocket size camcorders continue to spread (see Gizmodo comparison here). These will be supplemented by an upcoming generation of high-definition devices with Net connectivity through wifi or 3G networks.

Advertising Disintermediation. The media buying side is definitely not the sector to be in for the next decade. First of all, ad spending will continue its adjustment to the actual time spent on various medias. In 2008, print captured 20% of advertising dollars for only 8% of the time spent; in comparison, digital got 29% or our time but 8% of ad spending. Those numbers, those discrepancies tell us the correction is far from over.
Unless they devise smarter ways to analyze web audiences (see below, the audience measurement issue) and, as a result, clearly define the true value of each group of users, there is no longer a need for the media buyers’ costly intermediation. The trend is there: the most agile web sites will go directly to brands and advertisers, they will propose sophisticated integration mechanisms for their sites and mobile platforms. So do social networks such as the 25m users French Skyrock (see our case study).
Anyway, Google will settle the intermediation issue as its boss candidly puts it in Ken Auletta’s books (1): “Google wants to be the agent that sells the ads on all distribution platforms, whether it is print, television, radio or the internet. (…) As our technology gets better, we will be able to replace some of their [large companies] internal captive sales forces”. Media buyers, consider yourself notified: you’re toast.
As for the creative side, we hope advertising agencies will, at last, wake up and think of new ways to integrate their messages in digital media layouts (as in print), rather than trying to divert users away from media sites (see previous Monday Note on the inherent design flaws of the internet).