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Respect Your Salespeople: They Earn Your Salary

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by Jean-Louis Gassée

Another people-in-tech Monday Note, vs. tech itself, in the spirit of The HR-Less Performance Review and Firing Well, this time about the value of competent, service-oriented salespeople, and the respect we owe them – with our own interest in mind. 

We’re at the Board Meeting of a Valley start-up. An investor has exhorted the founder to go, go, go…push the (almost, we know how it goes) finished product to the market as quickly as possible. ‘But,’ the founder responds, ‘we first have to build a sales team, find some knowledgable people, teach them the product…’ The investor cuts him off:

“Don’t waste our time and money. Just get yourself a bunch of coin-operated salespeople…”

This thoughtless characterization of sales is too common, it’s counterproductive, and it has been part of the culture for a long time.

When a family catastrophe threw me out on the streets more than 50 years ago, I went through what California healers aptly call a psychosocial moratorium, a process of adaptation that landed me in a rapid succession of jobs, many in sales, from insurance and office equipment to pharmaceuticals and dietary supplements, mostly with undistinguished to really bad companies that treated their salespeople as cannon fodder.

When I joined Hewlett-Packard France four years later, I anticipated a more humane approach (accurately described in David Packard’s calm, almost reticent memoir: How Bill Hewlett and I Built Our Company). But, to my disappointment, not everyone adhered to the HP Way. When I started recruiting salespeople after launching the company’s first desktop computer, my methods were challenged: “Why do you insist on tech college degrees? Salesmen are mere peddlers.”

I had an uneducated intuition: We need salespeople who are masters of their products. The more they know about what they’re selling, the more they’ll sell.

Experience led to a theory: My Prospects will tell me as much as they think I can understand about their situation, their needs. By exhibiting a command of what I have to offer, I engender trust, which leads the Prospect to tell me more about his/her headaches, including office politics. Thus armed, I can propose a well-defined solution, suggest alternatives… or avoid a bad sale altogether.

It worked very well for me and the people I worked with, but the cheap view of sales endured.

So it was in Apple’s early days. Hired to start Apple France and develop a network of French retailers, I took my baptismal trip to the hallowed halls of Cupertino’s Bandley Drive in February, 1981. I got my company badge and immediately took off in my rental car to visit Apple shops along El Camino Real. A surprise awaited me. Everywhere I went, store owners welcomed me, smiled at my heavy French accent, and said they were delighted to see someone from Apple – at last. They’d never been visited by anyone from Cupertino, even though it was just a couple miles away.

I returned to the office and asked the head of Sales why he and his people had never visited Apple retailers. He brushed back his permed locks (yes, some straight men permed their hair back then) and scoffed: “Why bother? Apple ][s sell themselves.”

After I flew back home to Paris, I set up a sales organization that had a thorough knowledge of Apple products and an affinity for the company’s considerable ambitions. (I also started my habit of weekly writings with Apple Hebdo, a love and information newsletter from every department in the organization to our business partners.) The approach worked very well — well enough that I was brought back to the Valley in 1985, this time to run Apple’s engineering.

Back to the Board Meeting: I almost ask my fellow director why he wants to treat salespeople like street walkers. Doesn’t he realize that any sensible employee can sense our expectations and will naturally rise — or sink — to fulfill them?

Instead, I direct my questions to the CEO: Does he have a job description for sales? Prerequisites and salary range?

No. Not yet. The founder is an engineer and, regardless of his innate ability to sell his ideas to everyone from his parents to fellow workers and investors, he’s never “carried a bag”, he’s never had a sales job with a territory and a quota. And, like many fellow engineers, he oozes barely disguised disregard for sales and has mixed feelings about entrusting his precious creation into their less capable, dirtier hands.

Without a doubt (I assure him), the crystalline purity of what he and his team have created is the core asset. That’s who and what we invested in. But… what about the company’s money pump? Who fits the hoses into the proper spigots? Who works the levers and causes the sacred fluid to course from customers’ pockets into our coffers?

Fortunately, the CEO’s IQ overcomes his EQ, and he quickly regroups:

“You’re right…we need knowledgable salespeople. And really good ones because beta tests have shown early adopters to be happy… after a bit of orientation and learning.”

A salesperson’s domain knowledge isn’t just a boon to sales, it’s an important component when sales brings back customer feedback. Engineers know when they’re dealing with a “coin-operated” salesperson, and they have no respect for the species. ‘Ah, he doesn’t know what he’s talking about!’. Actually, engineers don’t have much respect for sales, period, but they’ll listen to a technically competent salesperson, particularly if he or she is bringing back an esoteric bug report.

Then there’s the issue of compensation. Too much “compensation pressure” leads to incautious statements about the product’s features and benefits, which leads to disappointed customers. And unless you’re a de facto monopolist such as a cable operator, you can’t afford even one unhappy customer.

Furthermore, most people want to do good and do well, in whichever order. Salespeople are no exception. Compensation mustn’t send the message that salespeople need only work hard (and smart) when they’re bribed.

I’ve seen and been part of a variety of sales compensation structures: All commission, no commission, bonuses on goals, bell curve compensation… They can all be made to work, but the point is this: The focus of selling mustn’t be about the sale, but about a relationship with the customer, a relationship that can lead to a steady stream of transactions.

A vignette comes to memory. At the now defunct Data General minicomputer company, nothing ever worked coming out of the factory, products had to be finished in the field. The DG salespeople, true survivors, were paid a commission of 1%. Not 1% of bookings, nor shipped revenue. No, they got 1% of collections. They got paid when customers paid… and customers didn’t pay until they were finally satisfied that what they bought also happened to work.

From time to time, marketing would visit from the Home Office to “gift” the salespeople with a shiny new product presentation. Savvy salespeople nodded, grin-effed the presenter…and then went out in the field to present the products as they actually worked. They knew what their customers would pay for, regardless of what the missi dominici touted.

Here’s to salespeople and to those who appreciate them.

JLG@mondaynote.com

Firing Well

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by Jean-Louis Gassée

Ending a work relationship needn’t be complicated or traumatic. It can be done in a sane and respectful way if a clean framework is set up at hiring time.

In an August, 2012 Monday Note titled The HR-Less Performance Review, I described a sane, humane way for an employer to conduct the dreaded Performance Review. The script is simple: More

FrankenNokia

 

by Jean-Louis Gassée

Stitching together the disparate body parts – and cultures – that make up Nokia-Alcatel-Lucent is not a task for the faint of heart. This week we look at what Rajeev Suri, the CEO of the combined companies, is up against.

April 15th 2015: Nokia “agrees” to the $16.6B takeover of Alcatel-Lucent. On the surface, the acqui-merger makes sense. Both companies make networking gear and they’re of similar size, each with 2014 revenues of about $16B. (Nokia’s latest financials; Alcatel-Lucent’s 2014 annual report.)

It’s a financially complex transaction involving two complicated and venerable companies. Debt is assumed, debt is exchanged for shares, new debt is issued…there are a lot of ifs and buts.

As expected when a deal isn’t a straight shot, Wall Street’s reaction is mixed. Some think Alcatel-Lucent’s shareholders are on the short end of the bargain. Others, such as Standard & Poor’s (S&P), the haruspex that fondles financial statements and divines the value of securities, buys into the deal partners’ obligatory rationale and opines that the merger will result in a stronger product portfolio and less financial risk. (Let’s keep in mind that this is the same S&P that contributed to the 2007 housing bubble and the resulting depression. It recently agreed to pay the United States $1.38 billion to settle civil fraud charges that the firm had inflated the value of mortgage investments.)

Regardless of the prognosis, these analyses have concentrated on the numbers, the regulatory hurdles, the challenges of competing with ascendent Chinese companies, or the rise of Software Defined Networking (SDN) competitors. They blithely overlook a more fundamental element that determines success or failure: Culture. As an old but eternal saying goes: Culture Eats Strategy For Breakfast, a saying attributed to management sage Peter Drucker.

Consider the paths that led the two companies to the altar.

Alcatel was founded in 1898 as Compagnie Générale d’Électricité (CGE). For more than a century, the company accretes and sheds businesses, mostly in France, but never achieves a solid, lasting market position.

Embroiled in a fraud and corruption controversy in 1995, Alcatel hires Serge Tchuruk to clean house and reshape the old electric equipment and electronics company. Tchuruk, a life-long chemical and energy man, had seen success as CEO of oil giant Total, but at Alcatel things don’t go his way and the company continues to lose money.

In an attempt to right the ship, Tchuruk explores a merger with Lucent, the telecom equipment company that was born from the AT&T breakup. The deal fails to conclude amidst accusations, from both sides, of “unreasonable demands”.

But Tchuruk is persistent. Five years later, in April 2006, he finally gets his way: “Alcatel and Lucent Technologies To Merge and Form World’s Leading Communication Solutions Provider”.

As part of the deal, Patricia Russo, Lucent’s CEO, relocates from New Jersey to Paris and becomes CEO of Alcatel-Lucent. Tchuruk stays on as non-executive chairman of the combined entity.

This was a deal based on weakness, a marriage of convenience between two struggling companies whose culturally incompatible teams were fixated, understandably, on surviving the impending “workforce optimizations”. Lucent carried habits of heart and mind that had been deeply embedded during its grand days nesting in Ma Bell’s well-regulated system. To top it off, no one believes that Russo and Tchuruk can work together.

The marriage doesn’t last. In October 2008, after two years of finger pointing and a further slide into industry irrelevance, both Tchuruk and Russo resign. (Tchuruk returned to the energy industry as CEO of Joule; Russo is back in the US as an HP Director and will almost certainly become Chairperson of HP Enterprise when the company is spun-off.)

Russo is replaced by Ben Verwaayen, a well-regarded, well-liked, and more restrained telecom industry veteran. He lasts for six years; the company continues to suffer.

In 2013, the task of turning Alcatel-Lucent around falls to Michel Combes, another respected and experienced telecom industry exec. Combes immediately launches a two-year mission aimed at cutting costs by 1B€. We’ve come to the end of the two-year time limit…and it looks like he made a reasoned decision to throw in the towel and go for the Nokia deal. Combes has let it be known he won’t stay on as a Nokia exec.

Nokia is a different story. Formed in 1865 as a paper pulp business, Nokia expands into galoshes and other rubber products around the turn of the 20th century (you can still put Nokian Tyres on your vehicle – a separate company). Soon after that, the company gets into electrical equipment (such as cables) and electronics.

After a long history of ups and downs, Nokia, under CEO Jorma Ollila, makes the fortuitous decision to get into the GSM networking business (late 1980s) and then the handset business (early 1990’s). By 2010, it’s the world’s largest handset maker, shipping 100M phones per quarter.

With its long history, its ability to ride crises and invent new businesses, its hard-won preeminence in the high-tech sector, it seems as though Nokia can survive anything.

Well, almost.

Nokia can’t compete in the new world of software platforms and ecosystems. (See a June 2010 Monday Note: Science Fiction, Nokia Goes Android.)

When it becomes painfully obvious that its too-many Symbian and Linux derivatives won’t cut it, Nokia makes a grievous mistake in appointing a former Microsoft exec, Stephen Elop, as CEO. Elop promptly Osborns the existing product line by prematurely announcing a new and improved Microsoft OS that takes a year to materialize.

After Nokia sells its collapsing handset business to Microsoft in 2013 (the deal finally closes in April 2014 for about $7B), the company is left with three businesses: Nokia NetworksHere (mapping technology), Nokia Technologies (guardians of a fat patent portfolio).

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[From Nokia’s latest quarterly numbers]

Nokia Networks is the result of the difficult absorption of Siemens’ networking operations, a joint venture once known as Nokia Siemens Networks (NSN), started in 2006 and fully “resolved” in 2013. Despite the birth pains, it’s Nokia’s main breadwinner, garnering 90% of the 12.7B€ achieved in 2014 (about $14B US at today’s rate) with decent operating margins (lately between 12% and 14%).

Nokia Technologies and Here don’t really matter. Combined, they weigh less than 12% of total sales. The patent licensing activity provides decent margins, more than 50%, but it doesn’t matter much with less than 4% of sales. Here’s 6.8% operating margin guarantees that it will be disposed of.

Throughout it’s history, Nokia has been decidedly and unabashedly Finnish. In its heyday, Nokia remained proud of its strong culture and gutsy sisu, even as its factories, Supply Chain Management operations, and carrier relations spanned the globe.

Today, the company is no longer the old Finnish Nokia; it’s now a kind of FrankenNokia assembled from disparate body parts and cultures that CEO Rajeev Suri, a 20-year veteran of Nokia, will have the thankless task of stitching together.

We’ll be watching to see if Nokia can regain its once-proud culture and overcome the “foreign bodies” introduced by the Alcatel-Lucent acquisition.

JLG@mondaynote.com

After The First 3 Million AppleWatches

 

By Jean-Louis Gassée

We’ll soon know what the AppleWatch is and what it can do…it may take a while to understand why Apple has gone to such lengths to hype the device.

Under Steve Jobs‘ leadership, Apple 2.0 obsessed over the marriage of form and function. Starting with Jony Ive’s Bondi Blue iMac, Apple products stood out in a sea of beige and black boxes. But even so, fashion, the providential spawn of this fecund marriage, has always been a by-product — welcome, but not a first-order pursuit

With the AppleWatch things have changed: Fashion is now a primary component, co-equal with silicon and software. The assertive, carefully planned, and richly resourced entrance into the world of the dernier cri is as notable as the device’s technical challenges (battery life, user interface, sensors…).

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We saw fashion writers at the September unveiling. Karl Lagerfeld and Anna Wintour attended the private event at Colette, one of Paris’ chicest stores on the ultra-chic rue Saint-Honoré. That these two fashion world divas — who don’t make paid appearances —  “found the time” to drop by speaks to the depth and strength of Angela Ahrendts’ (ex-CEO of Burberry), Paul Deneve’s (ex-CEO of Yves Saint Laurent), and Jony Ive’s various connections into a new world for Apple.

This recognition that  “fashion matters” has shown us something new: Apple is buying its way onto the covers of fashion and lifestyle magazines. (Search for “Apple Watch magazine covers” and you get about 57.6 million results; this may be a pittance compared to the 559M hits for a plain Apple Watch search, but it’s an impressive number, nonetheless.)

This is novel. Apple has a history of spending zero dollars advertising products it hasn’t delivered yet. Pre-launch rumors, whether erroneous or pinpoint accurate, are erogenous enough to enflame desire. On the first day of physical availability, customers happily line up at Apple Stores around the world.

Before we address the question of Apple’s foray into the world of Vogue, let’s admit that none of it will work until we know what the AppleWatch actually is, how it will affect and infect customers’ brains and entrails. We’re impressed by the physical objects we see in pictures on the dedicated website, including some famous Marc Newson designs for bands and clips, but the “live” experience, its intellectual and emotional nature will have the final word. For this we’ll have to wait — but not for long.

The first three million watches will sell “instantly”, in a couple of weeks, maybe less. These first sales won’t matter as much as will their consequence, the all-powerful Word of Mouth.

Let’s consider one scenario: The eager purchaser explores the device and shows it off to friends — who will want the full tour. As a result, the battery is exhausted in much less than the presumed day, perhaps a couple of hours in the most enthusiastic hands.

Bloggers shout from the rooftops: Let’s add the AppleWatch to the list of failed Apple products.

If this were a real problem, such as Antennagate or Apple Maps, we’d see a reaction from Apple, whether in the form of contorted explanations and settlement checks, or a sincere apology from Tim Cook — followed by management changes.

In the battery-exhausted-by-enthusiasm scenario, I don’t think Apple execs will wait and react. I expect them to be proactive. One law of good salesmanship is you don’t let the customer discover an important limitation – you proactively adjust expectations to forthcoming reality. (On that note, 9to5Mac has an good post on Apple Watch sales training for store employees. This old salesman agrees: Just help the purchase decision that’s already been made come to the surface.)

On Monday, when Tim Cook and other Apple execs do the AppleWatch Launch 2.0, let’s listen to the battery-life proaction. With months of field-testing by a large number of insiders, chances are management has an accurate view of early-adopters’ reactions.

One caveat: insiders might be just a bit too competent and thus consciously or unconsciously avoid the traps “naive” users will fall into. I’m optimistic, the Maps fiasco hasn’t been forgotten.

When we look beyond the first few weeks, it’s tempting to adopt the mercenary position and just consider the numbers. For the first year of sales, projections range from 8M to 30M units. Just for fun, I’ll use an iPhone-like average price, about $650. This adds up to revenue between $5B to $20B. That’s a wide range, from a minimally-noticeable contribution to the projected $250B company-wide (again, an approximation), to an insignificant blip.

Now let’s step back a bit and think about the AppleWatch’s place in Apple’s business.

The play, at least initially, is for the AppleWatch to make iPhones more valuable. The first iteration doesn’t pretend to stand on its own, it depends on the iPhone in the customer’s purse or pocket. For example, navigation might look good on the watch, but it has no GPS and thus needs the iPhone for geolocation. No sin, at least not in my book: The AppleWatch is an innovative and fashionable device that makes the iPhone, Apple’s monster money machine, more pleasant and more valuable.

Second, user interface innovations (the crown, pressure sensors on the screen) will generate new apps, new ideas, new usage patterns that will be adopted by other Apple products.

Third, critics may deride the enthusiasm of Apple devotees and cast them as cultish zealots, but given this level of unforced devotion, why spend so much advertising effort on the AppleWatch, particularly when the articles that accompany the pricey magazine covers do nothing to clarify what the product actually does?

Apple’s equal investment in both the technology and fashion of its watch may be glibly mocked, but I don’t think it’s so easily dismissed. I doubt Apple would go to such lengths for just one watch.

JLG@mondaynote.com

Afterthoughts…
One: John Kirk offers yet another of his literate, fun and relevant posts, this time, about AppleWatch, a cure for the pervasive malady of Premature Evaluation.

Two: Personally, if I had a choice between an AppleWatch and a new, even slimmer MacBook Air with a Retina screen and the latest Intel processor… I know which screen I’d look at the longest, which object I’d tinker with the most. But, of course, I want both.

Three: For perspective, see the March 24th, 2014 Wearables Fever Monday Note.

The NYTimes could be worth $19bn instead of $2bn  

 

by Frédéric Filloux

Some legacy media assets are vastly underestimated. A few clues in four charts.   

Recent annual reports and estimates for the calendar year 2014 suggest interesting comparisons between the financial performance of media (either legacy or digital) and Internet giants.

In the charts below, I look at seven companies, each in a class by itself:

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A few explanations are required.

For two companies, in order to make comparisons relevant, I broke down “digital revenues” as they appear in financial statements: $351m for the New York Times ($182m in digital advertising + $169m for digital subscriptions) and, for The Guardian, $106m (the equivalent of the £69.5m in the Guardian Media Group annual report (PDF here).

Audience numbers above come from ComScore (Dec 2014 report) for a common reference. We’ll note traffic data do vary when looking at other sources – which shows the urgent need for an industry-wide measurement standard.

The “Members” column seemed necessary because traffic as measured by monthly uniques does differ from actual membership. Such difference doesn’t apply to news media (NYT, Guardian, BuzzFeed).

For valuations, stock data provide precise market cap figures, but I didn’t venture putting a number the Guardian’s value. For BuzzFeed, the $850m figure is based on its latest round of investment. I selected BuzzFeed because it might be one of the most interesting properties to watch this year: It built a huge audience of 77m UVs (some say the number could be over 100m), mostly by milking endless stacks of listicles, with clever marketing and an abundance of native ads. And, at the same time, BuzzFeed is poaching a number first class editors and writers, including, recently, from the Guardian and ProPublica; it will be interesting to see how Buzzfeed uses this talent pool. (For the record: If founder Jonah Peretti and editor-in-chief Ben Smith pull this off, I will gladly revise my harsh opinion of BuzzFeed).

The New York Times is an obvious choice: It belongs to the tiny guild of legacy media that did almost everything right for their conversion to digital. The $169m revenue coming from its 910,000 digital subscribers didn’t exist at all seven years ago, and digital advertising is now picking up thanks to a decisive shift to native formats. Amazingly enough, the New York Times sales team is said to now feature a ratio of one to one between hardcore sales persons and creative people who engineer bespoke operations for advertisers. Altogether, last year’s $351m in digital revenue far surpasses newsroom costs (about $200m).

A “normal” board of directors would certainly ask management why it does not consider a drastic downsizing of newspaper operations and only keep the fat weekend edition. (I believe the Times will eventually go there.)

The Guardian also deserves to be in this group: It became a global and digital powerhouse that never yielded to the click-bait temptation. From its journalistic breadth and depth to the design of its web site and applications, it is the gold standard of the profession – but regrettably not for its financial performances, read Henry Mance’s piece in the FT.

Coming back to our analysis, Google unsurprisingly crushes all competitors when it comes its financial performance against its audience (counted in monthly unique visitors):

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Google monetizes its UVs almost five times better than its arch-rival Facebook, and 46 times better than The New York Times Digital. BuzzFeed generates a tiny $1.30 per unique visitors per year.

When measured in terms of membership — which doesn’t apply to digital media — the gap is even greater between the search engine and the rest of the pack :

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The valuation approach reveals an apparent break in financial logic. While being a giant in every aspects (revenue, profit, market share, R&D spending, staffing, etc), Google appears strangely undervalued. When you divide its market capitalization by its actual revenue, the multiple is not even 6 times the revenue. By comparison, BuzzFeed has a multiple of 8.5 times its presumed revenue (the multiple could fall below 6 if its audience remains the same and its projected revenue increases by 50% this year as management suggests.)  Conversely, when using this market cap/revenue metric, the top three (Twitter, Facebook, and even LinkedIn) show strong signs of overvaluation:

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Through this lens, if Wall Street could assign to The New York Times the ratio Silicon Valley grants BuzzFeed (8.5 instead of a paltry 1.4), the Times would be worth about $19bn instead of the current $2.2bn.

Again, there is no doubt that Wall Street would respond enthusiastically to a major shrinkage of NYTCo’s print operations; but regardless of the drag caused by the newspaper itself, the valuation gap is absurdly wide when considering that 75% of BuzzFeed traffic is actually controlled by Facebook, certainly not the most reliably unselfish partner.

As if the above wasn’t enough, a final look confirms the oddity of market valuations. Riding the unabated trust of its investors, BuzzFeed brings three times less money per employee  than The New York Times does (all sources of revenue included this time):

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I leave it to the reader to decide whether this is a bubble that rewards hype and clever marketing, or if the NYT is an unsung investment opportunity.

frederic.filloux@mondaynote.com

2015 Digital Media: A Call For a Big Business Model Cleanup 

 

by Frédéric Filloux

Digital media are stuck with bad economics resulting in relentless deflation. It’s time to wake-up and make 2015 the year of radical — and concerted — solutions.

Trends in digital advertising feel like an endless agony to me. To sum up: there is no sign of improvement on the performance side; a growing percentage of ads are sold in bulk; click-fraud and user rejection are on the rise, all resulting in ceaseless deflation. Call it the J-Curve of digital advertising, as it will get worse before it gets better (it must – and it will).

Here is a quick summary of issues and possible solutions.

The rise of Ad Blocking system, the subject of a December 8th, 2014 Monday Note. That column was our most viewed and shared ever, which measures a growing concern for the matter. Last week, AdBlockPlus proudly announced a large scale deployment solution: with a few clicks, system administrators can now install AdBlockPlus on an entire network of machines. This yet another clue that the problem won’t go away.

There are basically three approaches to the issue.

The most obvious one is to use the court system against Eyeo GmBH, the company operating AdBlockPlus. After all, the Acceptable Ads agreement mechanism in which publishers pay to pass unimpeded through ABP filters is a form of blackmail. I don’t see how Eyeo will avoid collective action by publishers. Lawyers — especially in Europe — are loading their guns.

The second approach is to dissuade users from installing ABP on their browsers. It’s is up to browser makers (Google, Microsoft, Apple) to disable ABP’s extensions. But they don’t have necessarily much of an incentive to do so. Browser technology is about user experience quality when surfing the web or executing transactions. Performance relies on sophisticated techniques such as developing the best “virtual machines” (for a glimpse on VM technology, this 2009 FT Magazine piece, The Genius behind Google’s browser  is a must-read). Therefore, if the advertising community, in its shortsighted greed, ends up saturating the internet with sloppy ads that users massively reject, and that such excesses led a third party developer to create a piece of software to eliminate the annoyance, it should be no surprise to see the three browsers providers tempted to allow ad blocking technologies.

Google’s is in a peculiar position on this because it also operates the ad-serving system DFP (DoubleClick for Publishers). Financially speaking, Google doesn’t necessarily care if a banner is actually viewed because DFP collects its cut when the ad is served. But, taking the long view, as Google people usually do, we can be sure they will address the issue in coming months.

The best way to address the growing ad rejection is to take it at its root: It’s up to the advertising sector to wake up and work on better ads that everybody will be happy with.

But reversing this trends will take time. The perversity of ad-blocking is that everyone ends up being affected by the bad practices of a minority: Say a user installs ABP on her computer after repeated visits on a site where ads are badly implemented, chances are that she will intentionally disconnect ABP on sites that carefully manage their ads are next to zero.

As if the AdBlock challenge wasn’t not enough, the commercial internet has to deal with growing “Bot Fraud”. Ads viewed by robots generating fake — but billable — impressions become a plague as the rate of bogus clicks is said to be around 36% (see this piece in MIT’s Technology Review). This is another serious problem for the industry when advertisers are potentially defrauded with such magnitude: as an example, last year, the FT.com revealed that up to 57% of a Mercedes-Benz campaign viewers actually were robots.

In the digital advertising sector, the places to find some relief remain branded content or native ads. Depending on how deals are structured, prices are still high and such ad forms can evade blocking. Still, to durably avoid user rejection, publishers should be selective and demanding on the quality of branded content they’ll carry.

Another ingredient of the cleanup involves Internet usage metrics — fixed and mobile. More than ever, our industry calls for reliable, credible and, above all, standardized measurement systems. The usual ‘Unique Visitor’ or page views can’t remain the de rigueur metrics as both are too easily faked. The ad market and publishers need more granular metrics to reflect actual reader engagement (a more critical measure when reading in-depth contents vs. devouring listicles dotted with cheap ads). Could it be time spent on a piece of content or shares on social networks? One sure thing, though: the user needs to be counted across platforms she’s using. It is essential to reconcile the single individual who is behind a variety of devices: PC, smartphone or tablet. To understand her attention level — and to infer its monetary value, we need to know when, for how long, and in which situations she uses her devices. Wether it is anonymously or based on a real ID, retrieving actual customer data is critical.

The answer is complicated, but one thing is sure: to lift up its depleted economics, the industry needs to agree on something solid and long-lasting.

The media industry solutions to the problems we just discussed will have a significant impact on digital information. As long as the advertising market remains in today’s mess, everybody loses: Advertisers express their dissatisfaction with more pressure on the prices they’re willing to pay; intermediaries — media buying agencies — come under more scrutiny; and, in the end, publisher P&Ls suffer. The two digital world ‘mega-gatekeepers’ — Facebook and Google — could play a critical role in such normalization. Unfortunately, their interests diverge. There is not a month when we do not see competition increase between them, on topics ranging from user attention, to mobile in emerging markets, internet in the sky, and artificial intelligence… At this stage, the result of this multi-front war is hard to predict.

frederic.filloux@mondaynote.com

The iPhone’s 8th Anniversary

 

by Jean-Louis Gassée

Smartphones existed before Steve Jobs introduced the iPhone on January 9th, 2007. But by upending existing technology platforms, application distribution, and carrier business models, he kickstarted a new era of computing whose impact is yet to be fully understood.

I knew one of the victims of the Charlie Hebdo massacre: Bernard Maris. We weren’t friends, just pleasantly casual acquaintances through the in-law side of my family. Typical Parisian dinner conversations “rearranging the world” led to a Palo Alto visit and an interview for a small Charlie Hebdo piece, complete with the requisite risqué drawing.

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[Bernard Maris]

After several false starts writing about the events in Paris, I’ve come to the conclusion that I’m too angry at too many targets, starting with certain cowards in the media who don’t understand that the fear of antagonizing oppressors perpetuates their power, that no good culture can exist without a dose of bad taste, that the demand to never be offended is inhumane. As Cardinal André Vingt-Trois, archbishop of Paris puts it: ‘A caricature, even in bad taste, criticism, even extremely unfair, cannot be put on the same plane as murder.

(Lovers of ironic detail will note that Cardinal Vingt-Trois was once the titular bishop of Thibilis, Algeria. In partibus infidelium.)

Instead, I will turn to a more positive train of thought: The beginning of the Smartphone 2.0 era.

Eight years ago, Steve Jobs walked onto the stage at MacWorld San Francisco and gave a masterful performance. His presentation is worth revisiting from time to time, a benchmark against which to evaluate a PowerPoint-addled CEO pitch or a product intro cum dance number.

In his talk, Jobs tells us that the iPhone is one of these products that, like the Mac and the iPod before, “changes everything”. He was right, of course, but one wonders… even with his enormous ambition, did Jobs envision that the iPhone would not only transform Apple and an entire industry, but that it would affect the world well beyond the boundaries of the tech ecosystem?

If the last sentence sounds a bit grand, let’s look at the transformation of the smartphone industry, starting with Apple.

In 2006, the year before the iPhone, Apple revenue was $19B (for the Fiscal Year ending in September). That year, iPod revenue exceeded the Mac, $7.7B to $7.3B…but no one claimed that Apple had become an iPod company.

In 2007, revenue climbed to $24B, a nice 26% progression. Mac sales retook the lead ($10.3B vs. $8.3B for the iPod), and iPhone sales didn’t register ($123M) as shipments started late in the Fiscal Year and accounting’s treatment of revenue blurred the picture.

In 2008, revenue increased to $32.5B, up 35%. iPhone revenue began to weigh in at $1.8B, far behind $9B for the iPod and $14.3B for the Mac (a nice 39% uptick).

In 2009, revenue rose by a more modest 12%, to $36.5B — this was the financial crisis. iPod declined to $8B (- 11%) as its functionality was increasingly absorbed by the iPhone, and the Mac declined a bit to $13.8B (- 3%). But these shortfalls were more than compensated for by iPhone revenue of $6.8B (+ 266%), allowing the company to post a $4B increase for the year. This was just the beginning. (And even the beginning was bigger than originally thought: Due to a change in revenue recognition esoterica, 2009 iPhone revenue would be recalculated at $13.3B.)

In 2010, iPhone revenue shot up to $25B, pushing Apple’s overall revenue up by a phenomenal 52% to $65B. The iPhone now represented more than 1/3rd of total revenue.

In 2011, growth accelerates, revenue reaches $108B (+ 66%), more than five times the pre-iPhone 2006 number. iPhone reaches $47B (+ 87%), now almost half of the company’s total.

For 2012, sales shoot up to $156.5B (+ 45%), and the iPhone reaches $80.5B (+ 71%). At such massive absolute numbers, 45% and 71% growth look almost unnatural as they appear to violate the Law of Large Numbers. As this happens, the iPhone crosses the 50% of total revenue threshold, and accounts for probably 2/3rd of Apple’s total profit.

Apple’s growth slowed in 2013 to a modest + 9%, with $171B overall revenue. The iPhone, weighing in at $91.3B (+ 16%), provides most ($12.6B) of the modest ($14B) overall revenue increase and 53% of total sales.

Last year, growth slows just a bit more: $182.8B (+ 7%) with the iPhone reaching $102B (+12%). Once again, the iPhone contributes most of the total revenue growth ($10.7B of $11.9B) and fetches 56% of the company’s sales. Notably, the iPad shows a 5% decrease and, at $2.3B, the iPod is becoming less and less relevant. (Although, how many companies would kill for $2.3B in music player revenue?)

The excellent Statista portal gives us picture of the iPhone’s emergence as Apple’s key product:

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While the company is about ten times larger than it was before the iPhone came out, the smartphone industry has become a nearly trillion dollar business. Depending on how we count units and dollars, if we peg Apple at 12% market share, that means the worldwide number across the smartphone industry reaches $800B. If we grant Apple just a 10% share, we have our $1T number.

For reference, still according to Statista, the two largest auto companies, Toyota and the Volkswagen Group, accounted for $485B in revenue in 2013:

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However we calculate its size, whether we place it at $800B or $1T, what we mustn’t do is think that the smartphone industry merely grew to this number. Today’s smartphone business has little in common with what it was in 2006.

Consider that Motorola “invented” the cell phone. Now Motorola is (essentially) gone: Acquired by Google, pawned of to Lenovo, likely to do well in its new owner’s Chinese line.

Nokia: The Finnish company stole the crown from Motorola when cell phones became digital and once shipped more than 100M phones per quarter. Since then, Nokia was Osborned by its new CEO, Stephen Elop, an ex-Microsoft  exec, and is now owned by Elop’s former employer. With 5% or less market share, Nokia is waste of Microsoft resources and credibility… unless they switch to making Android phones as a vehicle for the company’s  “Cloud-First, Mobile-First” apps.

Palm, a company that made a credible smartphone by building on their PDA expertise, was sold to HP and destroyed by it. They’re worse than dead, with a necrophiliac owner (TCL), and LG humping other parts of the corpse for their WebOS TVs and a WebOS smartwatch.

And then there’s the BlackBerry. Once the most capable of all the smartphones with a Personal Information Manager that was ahead of its time, it was rightly nicknamed CrackBerry by its devoted users. Now BlackBerry Limited is worth less than a 1/100th of Apple, and is trying to find a niche – or a seeker of body parts.

The change in the industry is, of course, far from being solely Apple’s “fault”. In many ways, Google destroyed more incumbents than Apple. Google acquired Android in 2005, well before the iPhone appeared. According to the always assertive Tomi Ahonen, China now sports more than 2000 (!) phone brands, all based on some Android derivative. And let’s not forget the voraciousness of Apple’s giant Korean frenemy Samsung, which acts as both a supplier of key iPhone components and a competitor.

But is the industry now settled? Are any of the current incumbents, including Apple, unassailable? Market-leading Samsung appears to be challenged by both Apple at the high end and Xiaomi from below, and has announced more recent troubles. Our friend Tomi argues that Xiaomi isn’t the new Apple but that Lenovo and Huawei are the ones to watch. And, of course, Apple is seen as a “hits” company, a business that lives and dies by its next box-office numbers — and the numbers for the new iPhone 6 aren’t in, yet They’re likely be very strong.

Regardless of any individual company’s business case, the overall of impact of the smartphone on the world is what counts the most. In a blog post titled Tech’s Most Disruptive Impact Over the Next Five Years, Tim Bajarin argues that the real Next Big Thing isn’t the Internet of Things, Virtual Reality, or BitCoin. These are all important advances, but nothing compared to the impact of smartphones [emphasis mine]:

“Another way to think of this is that smart phones or pocket computers connecting the next two billion people to the internet is similar to what the Gutenberg Press and the Bible were to the masses in the Middle Ages.”

As Horace Dediu notes, we’re on track to 75% US smartphone penetration by the end of 2014. The big impact to come will be getting the entire world to reach and exceed this degree of connectivity, especially in areas where there’s little or no wired connectivity.

This is what Steve Jobs started eight years ago by upending established players and carrier relationships.

JLG@mondaynote.com

My Best Reads This Year

by Frédéric Filloux

For this year’s last Monday Note, I chose to share a few interesting topics I followed in 2014. I expect many of them will stay high in next year’s news cycle. Here are my picks, in about 40 links.

The Great Mobile Takeover…

Next year, the vast majority of media will see more than 50% of their traffic coming from mobile devices (Facebook is way ahead with 65%). We might see a new breed of mobile-only quality media, but the ecosystem still has to come up with ad formats that don’t irritate audiences, and adjusting revenue streams won’t be easy. Last October, Andreessen Horowitz’s Benedict Evans came up with his Mobile is Eating the World stack of data. It goes in the same direction as Mary Meeker’s bi-annual State of the Internet slide deck, thus reinterpreted by the Atlantic : Mobile Is Eating Global Attention: 10 Graphs on the State of the Internet.

… And How it Will Impact “The Next Billion”

Quartz coined the “Next Billion” phrase and went on to build a cluster of conferences around it (the next is May 19 in London). If 85% of the world population lives within range of a cell tower (including 2G connectivity), 4.3 billion people are still not connected to the web. They will do so by getting a smartphone. According to the GSMA trade group, the number of smartphones will increase by 3 billion by 2020 as the infrastructure is built and handset prices keep falling (they cost currently less that $75).

More in this series of links from Quartz:

Internet cafes in the developing world find out what happens when everyone gets a smartphone
How to map wealth in Africa using nothing but mobile-phone minutes
How to sell gigabytes to people who’ve never heard of them
This mobile operator wants to charge $2.50 a year for access to Facebook
Kenya’s merchants are warming up to a payment system born in a Seattle basement

Last Fall, BusinessWeek ran a special edition about tech outside Silicon Valley. I found these two pieces:
China’s Xiaomi, the World’s Fastest-Growing Phone Maker
Ten Days in Kenya With No Cash, Only a Phone in Nairobi.

Thanks to fancy technologies, 2015 will see all Internet titans competing for these billions of potential customers. In 2013, Wired came up with The Untold Story of Google’s Quest to Bring the Internet Everywhere—By Balloon, followed by this recent update, Google’s Balloon Internet Experiment, One Year Later.

Time Magazine broke all limits of “access journalism” (lots of space in exchange of an exclusive) with this cover story:

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It’s  a nine pages quasi-stenographed account of a press junket arranged by Facebook in India. In it, Lev Grossman “soberly” sums things up:

Over the past decade, humanity hasn’t just adopted Facebook; we’ve fallen on it like starving people who have been who have been waiting for it our entire lives as it were the last missing piece of our social infrastructure as a species.

Since it is behind a paywall I’m not providing a link for this de facto press kit (I assume you can live without it.)

The social doubters

Not everyone has been touched by grace as Lev Grossman was. Among skeptics, Alexis Madrigal from The Atlantic is one of my favorite. Last month, he wrote The Fall of Facebook, a contrarian piece in which he states that “The social network future dominance is far from assured”. He is not the only one to cast such doubt. Bloomberg, for instance, notes that Facebook’s Popularity Among Teens Dips Again while its columnist Leonid Bershidsky, in his trademark stern way, contends Google Deserves Its Valuation, Facebook Doesn’t. On the social phenomenon, this NYT’s OpEd page: The Flight From Conversation by MIT professor Sherry Turkle is a must read.

Journalism

2014 has been quite a year for journalism with endless reverberations of the Snowden affair and the subsequent release of Citizen Four. A must-read of the documentary background is this NYT story:

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The Snowden affair is sure to give a boost to investigative reporting.

I bet 2015 will see the rise of Pierre Omidyar’s media venture First Look Media. The project has been mocked for its stumbling debut (read Mathew Ingram piece First Look Media has forgotten the number one rule of startups). A few weeks ago, I spoke with Pierre and John Temple, First Look’s chief, at a conference in Phoenix, Arizona. Our discussion fell under the Chatham House Rule, meaning I’m not saying who exactly said what. To me, both men have the vision (and the funding) to build a media that could rattle the right cages. (A good read: The Pierre Omidyar Insurgency — New York Magazine). I simply hope Pierre and John will look beyond the United States, there are plenty of stories in Europe as well. Still on journalism, don’t mis Dan Gillmor’s piece about The New Editors of the Internet (The Atlantic); it raises interesting questions about who controls what we see and don’t see on the Web.

Ebola was — and remains — one of the big stories of the year.

I have two friends — two American doctors — who have been on the front line in Sierra Leone and Liberia for months. There is not a single day when I don’t think about their commitment and the risks they take to help the victims of this terrible disease.

Just to grasp the gruesomeness of the situation, watch this video from Time Magazine in which photojournalist John Moore explains his coverage of the epidemic.

Mashable also published Eyewitness to Hell: Life in Ebola-Ravaged Liberia, a horrifying photo essay. Also among the must-reads: Inside the Ebola Wars and In the Ebola Ward, both by The New Yorker’s Richard Preston, an expert on the matter and author of the famous book The Hot Zone. On the economics side, Business Week came up with this cover story: How the U.S. Screwed Up in the Fight Against Ebola

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The rise of the Islamic State was the other big story of the year

Here are my picks in the abundant coverage. First, Vice News’ subjective, but extremely effective four part videos was a revelation. For the first time, a reporter was embedded (sort of) in ISIS. (He had to obey the Rules for Journalists in Deir Ezzor compiled by Syria Deeply.)

More classical but definitely a must-read is Guardian’s Isis: the inside story by Martin Chulov, probably the best account so far. As backgrounders, read ISIS’ Harsh Brand of Islam Is Rooted in Austere Saudi Creed (NYT), The Ancestors of ISIS (NYT), How ISIS Works (NYT) and How the US Created the Islamic State  (Vice).

[miscellaneous]

Let’s conclude with subjects such as the Sony hack. First, to get an idea of the relentlessness of the cyberattacks the US faces on a permanent basis, have a look at this real-time map:

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As far as Sony is concerned, the studio’s apparent cowardice shouldn’t have surprised anyone. Still, was the stolen information legitimate news fodder? Certainly not, yells Aaron Sorkin in a New York Times OpEd : The Press Shouldn’t Help the Sony Hackers. Of course it is, retorts Los Angeles Times’ business columnist Michael Hiltzik: Why The press must report those Sony hacks.

In the Sharing Economy, Workers Find Both Freedom and Uncertainty (NYT) or the reality of a Uber/Lyft driver. Uber will remain a big story in 2015 as its ruthlessness will keep feeding the news cycle (read Uber C.E.O. Travis Kalanick’s Warpath (Vanity Fair)

The Military’s Rough Justice on Sexual Assault (NYT) by Natasha Singer who came up with extraordinary journalistic work on the women who dare to fight the institution.

And finally, another Vanity Fair feature: How Marine Salvage Master Nick Sloane Refloated Costa Concordia, and a moving reportage from The New Yorker: Weather Man, Life at a Remote Russian Weather Station served by the work of a fabulous young photographer, Evgenia Abugaeva, herself born in the Russian Arctic town of Tiksi.

Happy Holiday readings. See you next year.

frederic.filloux@mondaynote.com

MSFT Hardware Futures

 

(Strangely, the WordPress software gives me a “Bad Gateway 502″  error message when I fully spell the name of the Redmond company)

by Jean-Louis Gassée

Microsoft’s hardware has long been a source of minor profit and major pain. In this last 2014 Monday Note, we’ll look at the roles Microsoft’s hardware devices will play — or not —  in the company’s future.

Excluding keyboards and the occasional Philippe Starck mouse, Microsoft makes three kinds of hardware: Game consoles, PC-tablet hybrids, and smartphones. We’ll start with the oldest and least problematic category: Game consoles.

Building on the success of DOS and its suite of business applications, Microsoft brought forth the MSX reference platform in 1983. This was a Bill Gates-directed strategic move, he didn’t want to leave the low-end of the market “unguarded”. Marketed as “home computers”, which meant less capable than a “serious” PC, MSX-branded machines were manufactured by the likes of Sony and Yamaha, but its only serious impact was in gaming. As the Wikipedia articles says, “MSX was the platform for which major Japanese game studios, such as Konami and Hudson Soft, produced video game titles.”

For the next two decades, gaming remained a hobby for Microsoft. This changed in 2001 when the company took the matter into its own hands and built the Xbox. Again, the company wanted to guard against “home invasions”.

With its Intel processors and customized version of Windows, the first iteration of the Xbox was little more than a repackaged PC. The 2005 Xbox 360 was a heartier offering: It featured an IBM-designed Power-PC derivative processor and what some call a “second-order derivative” of Windows 2000 ported to the new CPU.

Now we have the Xbox One. Launched in 2013, the platform is supported by a full-fledged ecosystem of apps, media store, and controllers such as the remarkable Kinect motion sensor.

Success hasn’t been easy. The first Xbox sold in modest numbers, 24 million units in about five years. Sales of the second generation Xbox 360 were better — almost 80 million through 2013 — but it was plagued with hardware problems, colloquially known as the Red Ring of Death. Estimates of the number of consoles that were afflicted range from 23% to more than 54%. Predictably, poor reliability translated into heavy financial losses, as much as $2B annually. Today’s Xbox One fares a little better: It lost only $800M for the first eight months of its life, selling 11.7M units in the process.

Microsoft’s latest numbers bundle Xbox game consoles and Surface tablet-PCs into a single Computing & Gaming category that makes up $9.7B of the company’s $87B in revenue for the 2014 Fiscal Year. This means Xbox console contribute less than 10% of total sales, which is probably why Satya Nadella, Microsoft’s new CEO, has carefully positioned the Xbox business as less than central to the company’s business:

“I want us to be comfortable to be proud of Xbox, to give it the air cover of Microsoft, but at the same time not confuse it with our core.”

In other words, the Xbox business can continue… or it could disappear. Either way, it won’t have much effect on Microsoft’s bottom line or its future.

For the moment, and with the assistance of a holiday price cut, Xbox One sales are topping those of the Sony PS4, but that shouldn’t take our attention away from a more important trend: The rise of mobile gaming. Smartphones are gaining in raw computing power, connectivity, display resolution, and, as a result, support from game developers on both Android and iOS platforms. Larger, more capable game consoles aren’t going away, but their growth is likely to slow down.

The history of Xbox problems, Nadella’s lukewarm embrace of the series, the ascendency of mobile gaming… by comparison the Surface tablet should look pretty good.

It doesn’t.

When Steve Ballmer introduced the Surface device in June, 2012, he justified Microsoft’s decision to compete with its own Windows licensees by the need to create a “design point”, a reference for a new type of device that would complement the “re-imagined” Windows 8.

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Two and a half years later, we know two things: Surface tablet sales have been modest (about $2B in the 2014 Fiscal Year ended June 30th), and Windows 8 frustrated so many users that Microsoft decided to re-re-imagine it and will re-introduce it as Windows 10, scheduled to be released in mid-2015.

Microsoft believes its Surface combines the best of the PC with the best of a tablet. While the hybrid form has given rise to some interesting explorations by PC makers, such as the Yoga 3 Pro by Lenovo, many critics — and not just Apple — condemn the hybrid as a compromise, as a neither-nor device that sub-optimizes both its tablet and its PC functions (see the tepid welcome given to the HP Envy).

What would happen if Microsoft stopped making Surface Pro tablets? Not much… perhaps a modest improvement in the company’s profit picture. While the latest quarter of Surface Pro 3 sales appear to have brought a small positive gross margin, Surface devices have cost Microsoft about $1.7B over the past two years. Mission accomplished for the “design point”.

We now turn to smartphones.

Under the Ballmer regime, Microsoft acquired Nokia rather than let its one and only real Windows Phone licensee collapse. It was a strategic move: Microsoft was desperate to achieve any sort of significance in the smartphone world after seeing its older Windows Mobile platform trounced by Google’s Android and Apple’s iOS.

In the latest reported quarter (ended September 30th 2014), Windows Phone hardware revenue was $2.6B. For perspective, iPhone revenue for the same period was $23.7B. Assuming that Apple enjoys about 12% of the world smartphone market, quarterly worldwide revenue for the sector works out to about $200B… of which Microsoft gets 1.3%. Perhaps worse, a recent study says that Microsoft’s share of the all-important China smartphone market is “almost non-existent at 0.4 percent”. (China now has more than twice as many smartphone users, 700M, as the US has people, 319M.)

Hardware development costs are roughly independent of volume, as is running an OS development organization. But hardware production costs are unfavorably impacted by low volumes. Windows Phones sell less and they cost more to make, putting Microsoft’s smartphone business in a dangerous downward spiral. As Horace Dediu once remarked, the phone market doesn’t forgive failure. Once a phone maker falls into the red, it’s nearly impossible to climb back into the black.

What does all this mean for Microsoft?

Satya Nadella, the company’s new CEO, uses the phrase “Mobile First, Cloud First” to express his top-level strategy. It’s a clear and relevant clarion call for the entire organization, and Microsoft seems to do well in the Cloud. But how does the Windows Phone death spiral impact the Mobile First part?

In keeping with its stated strategy, the company came up with Office apps on iOS and Android, causing bewilderment and frustration to Windows Phone loyalists who feel they’d been left behind. Versions of Office on the two leading mobile platforms ensures Microsoft’s presence on most smartphones, so why bother making Windows Phones?

Four and a half years ago, in a Monday Note titled Science Fiction: Nokia Goes Android, I fantasized that Nokia ought to drop its many versions of Symbian and adopt Android instead. Nokia insiders objected that embracing a “foreign OS” would cause them to lose control of their destiny. But that’s exactly what happened to them anyway when they jumped into bed with Stephen Elop and, a bit later, with Windows Phone. This started a process that severely damaged phone sales, ending with Microsoft acquisition of what was already a captive licensee.

Now the Android question rises again.

Should Microsoft pursue what looks like a manly but losing Windows Phone hardware strategy or switch to making and selling Android phones? Or should it drop an expensive smartphone design, manufacturing, and distribution effort altogether, and stay focused on what it does already, Mobile First, Cloud First applications?

The Rise of AdBlock Reveals A Serious Problem in the Advertising Ecosystem

 

By Frédéric Filloux

Seeing a threat to their ecosystem, French publishers follow their German colleagues and prepare to sue startup Eyeo GmbH, the creator of anti-advertising software AdBlock Plus. But they cannot ignore that, by using ABP, millions of users actively protest against the worst forms of advertising. 

On grounds that it represents a major economic threat to their business, two groups of French publishers are considering a lawsuit against AdBlockPlus creator Eyeo GmbH. (Les Echos, broke the news in this story, in French).
Plaintiffs are said to be the GESTE and the French Internet Advertising Bureau. The first is known for its aggressive stance against Google via its contribution to the Open Internet Project. (To be clear, GESTE said they were at a “legal consulting stage”, no formal complaint has been filed yet.) By his actions, the second plaintiff, the French branch of the Internet Advertising Bureau is in fact acknowledging its failure to tame the excesses of the digital advertising market.

Regardless of its validity, the legal action misses a critical point. By downloading the plug-in AdBlock Plus (ABP) on a massive scale, users do vote with their mice against the growing invasiveness of digital advertising. Therefore, suing Eyeo, the company that maintains ABP, is like using Aspirin to fight cancer. A different approach is required but very few seem ready to face that fact.

I use AdBlock Plus on a daily basis. I’m not especially proud of this, nor do I support anti-advertising activism, I use the ad-blocker for practical, not ideological, reasons. On too many sites, the invasion of pop-up windows and heavily animated ad “creations” has became an annoyance. A visual and a technical one. When a page loads, the HTML code “calls” all sorts of modules, sometimes 10 or 15. Each sends a request to an ad server and sometimes, for the richest content, the ad elements trigger the activation of a third-party plug-in like Adobe’s Shockwave which will work hard to render the animated ads. Most of the time, these ads are poorly optimized because creative agencies don’t waste their precious time on such trivial task as providing clean, efficient code to their clients. As a consequence, the computer’s CPU is heavily taxed, it overheats, making fans buzz loudly. Suddenly, you feel like your MacBook Pro is about to take off. That’s why, with a couple of clicks, I installed AdBlock Plus. My ABP has spared me several thousands of ad exposures. My surfing is now faster, crash-free, and web pages looks better.

I asked around and I couldn’t find a friend or a colleague not using the magic plug-in. Everyone seems to enjoy ad-free surfing. If this spreads, it could threaten the very existence of a vast majority of websites that rely on advertising.

First, a reality check. How big and dangerous is the phenomenon? PageFair, a startup-based in Dublin, Ireland, comes up with some facts. Here are key elements drawn from a 17-pages PDF document available here.

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Put another way, if your site, or your apps, are saturated with pop-up windows, screaming videos impossible to mute or skip, you are encouraging the adoption of AdBlock Plus — and once it’s installed on a browser, do not expect any turning  back. As an example of an unwitting APB advocate:

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Eyeo’s AdBlock Plus takes the advertising rejection in its own hands — but these are greedy and dirty ones. Far from being the work of a selfless white knight, Eyeo’s business model borders on racketeering. In its Acceptable Ads Manifesto, Eyeo states the virtues of what the company feels are tolerable formats:

1. Acceptable Ads are not annoying.
2. Acceptable Ads do not disrupt or distort the page content we’re trying to read.
3. Acceptable Ads are transparent with us about being an ad.
4. Acceptable Ads are effective without shouting at us.
5. Acceptable Ads are appropriate to the site that we are on.

Who could disagree? But such blandishments go with a ruthless business model that attests to the merits of straight talk:

We are being paid by some larger properties that serve non-intrusive advertisements that want to participate in the Acceptable Ads initiative.
Whitelisting is free for all small and medium-sized websites and blogs. However, managing this list requires significant effort on our side and this task cannot be completely taken over by volunteers as it happens with common filter lists.
Note that we will never whitelist any ads that don’t meet these criteria. There is no way to buy a spot in the whitelist. Also note that whitelisting is free for small- and medium-sized websites.
In addition, we received startup capital from our investors, like Tim Schumacher, who believe in Acceptable Ads and want to see the concept succeed.

Of course, there is no public rate card. Eyeo doesn’t provide any measure of what defines  “small and medium size websites” either. A 5 million monthly uniques site can be small in the English speaking market but huge in Finland. And the number of “larger properties” and the amount they had to pay to be whitelisted remains a closely guarded secret. According to some German websites, Eyeo is said to have snatched $30m from big internet players; not bad for a less than 30 people operation (depending of the recurrence of this “compliance fee” — for lack of a better term.)

There are several issues here.

One, a single private entity cannot decide what is acceptable or not for an entire sector. Especially in such an opaque fashion.

Two, we must admit that Eyeo GmbH is filling a vacuum created by the incompetence and sloppiness of the advertising community’s, namely creative agencies, media buyers and organizations that are supposed to coordinate the whole ecosystem (such as the Internet Advertising Bureau.)

Three, the rise of ad blockers is the offspring of two major trends: a continual deflation of digital ads economics, and the growing reliance on ad exchanges and Real Time Bidding, both pushing prices further down.

Even Google begins to realize that the explosion of questionable advertising formats has become a problem. Proof is its recent Contributor program that proposes ad-free navigation in exchange for a fee ranging from $1 to $3 per month (read this story on NiemanLab, and more in a future Monday Note).

The growing rejection of advertising AdBlock Plus is built upon is indeed a threat to the ecosystem and it needs to be addressed decisively. For example, by bringing at the same table publishers and advertisers to meet and design ways to clean up the ad mess. But the entity and leaders who can do the job have yet to be found.

frederic.filloux@mondaynote.com