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The economics of moving from print to online:
lose one hundred, get back eight

Let’s kill a myth. The dream of a compact newsroom, able to output a high-intensity general news website doesn’t fly. Numbers simply don’t add up. And here is why.
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First, the cost structure of a daily. In a typical operation, the biggest costs are industrial ones: around 25%-35% for paper and printing; another 30%-40% for distribution; around 18-25% for editorial; the remaining 10-15% are for administrative and marketing expenditures. It varies from country to country but we can safely assert most of the costs — at least 60% — are industrial in nature. Evidently, that part disappears when going online.
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Now let’s compare three numbers:
a) the cost of an online newspaper,
b) the audience needed to absorb costs
c) the audience of the biggest website
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Journalists make up most of the costs of a pure digital newsroom. As an example, assume the “loaded” (salary, benefits, expenses, overhead) cost of one journalist is about 60,000 € per year.  If the objective is to provide a general news site, the starting point for a comparison is the print press. As an high end instance, a newsroom such as the New York Times’ still counts 1400 journalists, paper and digital operations included (they tend to merge).  The Los Angeles Times now has 720 after the deep cuts demanded by its new owner (10 years ago, the headcount was 1300).  The Washington Post has a staff of 600.
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These are extremes. As a credible metric, we can take a big national European newspaper with an editorial staff of 400 to 500 people. For today’s demonstration, we’ll assume many people are involved in print-related production such as sub-editing, graphics, layout, etc. Plus, we all now those newspapers newsrooms are not exactly hallmarks of productivity. In short, I am certain we can produce good quality general news coverage with one hundred full-time equivalent dedicated journalists. (For their opposite reasons, editors and bean-counters are going to yell at me, that’s a good sign). I’m including writers, reporters, editors, photo and graphics editors, part-time specialized free-lance and front page editors.  Annual personnel costs: €6m. To this, let’s add an arbitrary $1m for technical and infrastructure costs, €2m for marketing and another €1m for administrative costs and misc. Total: €10m per year.
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Question: how many unique visitors do you need to cover €830,000 every month? Well, based on an analysis of some news websites (plus couple of business plan on my hard disk), the average revenue par unique visitors per month appears to range from  €0,10 to €0,25 (let’s forget the euro/dollar conversion for a moment, and assume both currencies have the same purchasing power in their respective countries). Let’s be conservative and stick with the lower number. No need for a calculator, then:  Translated into Unique Visitors per Month, a €830,000 monthly burn rate requires a hefty 8.3 million UV per month to break-even (and I’m not even talking of remunerate the cost of capital, paying back the shareholders, and forget about arousing analysts).
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Now  let’s turn to the table below; it shows recent traffic data (as much as we can reasonably get some — see Monday Note #51 for comments on this issue).
I’ve excluded websites tied to a major newspaper.
- The Huffington Post:  4m UV (Nielsen) 6mUV (claimed)
- Slate.com:   <3 mUV
- Tech Crunch:  3.2 mUV (claimed)
- The Drudge Report:  3 mUV (Nielsen)
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Now, big newspapers with great brands (Nielsen figures):
- New York Times online:  21 mUV
- USA Today :  11 mUV
- WashingtonPost.com:  9 mUV
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And in France:
- LeFigaro.fr:   4.2 mUV
- LeMonde.fr:  3.5mUV
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You get the picture: We are not here, yet.
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In the world’s biggest market (the US), if the goal is the online equivalent of a daily newspaper, no independent, pure player, general news website is able to achieve even half of the break-even revenue required to just stay afloat. Only big news brands, powered by (still) immense newsrooms are able to pull in decent audiences (remember, we are talking of audience goals able to support a newsroom set at a fifth of big newspaper’s).
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Let’s now compare the revenue per Unique user on a annual basis –  i.e. between €1,2 and €3 — and the revenue of big, quality free newspapers such as 20 Minutos in Spain and 20 Minutes in France. (I gave up doing a comparison model with the paid press, too many variables, too different models). Both are n°1 in their market with more than 2.5m readers per day. Their revenue comes only from ad pages, there is no distortion coming from the copy-sale revenue.  20 Minutos made €46.8m in 2007 and the French 20 minutes €45m. It means that each reader brings more than €18 per year. Compare this to € 1,2 per year per UV for online sites above.  By switching online for general news, we are trading euros (or dollars) for cents, literally.
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Still, this is no reason to hang on to an inexorably shrinking print media. Yes, there are ways to slow down, not reverse, the decline of newspapers: combining online and offline operations, adjusting  variables such as distribution (volume, distribution, timing), pricing to audience expectations and structure, etc. But the future lies in drawing the picture of a news organization compatible with the new economics describe above.
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Therefore, what does a sustainable online news organization look like? One thing is sure already: news is no longer able to sustain itself. The game becomes finding “alternate subsidy” streams. In the old newspaper model, Sports section advertisers subsidized the political columnist, or the classified pages paid for our guy on the ground in Iraq. Now, Sports coverage has migrated to a sports-site (and even disseminated on sub-specialized outlets), and classifieds moved to a vast array of highly profitable sites. Politics content finds refuge on the Huffington Post or on Slate. (And the guy in Iraq can only be afforded by big news organization). In passing, this dissemination is a response to the question of separate sites/brands for specific target groups: the answers seems to be yes — as long as we can: a) take advantage of specialization to charge higher CPT and b) build a network of sites arranged to benefit from massive economies of scale (back-offices, tech, sales, administration).
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This is similar to the transformation forced onto the music industry: it had to find other sources of revenue to compensate for the erosion of its core product.  Media have to find other income streams derived from their core competencies. The tech niche for instance, thanks to its peculiar DNA, is doing well. On the US market, many sites enjoy high CPT, a reasonable independence vis-à-vis their subjects, and are good at finding other sources of income: TechCrunch for instance is making more money from its yearly conferences than from its page views, although the scale remains small.
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My guess is corporate money will inevitably percolate into news economics through service contracts, requests for expertise, corporate communication assignments. The boundaries between sectors will blur. It already happened in the universities where contract-based private grants co-exist with fundamental research — and to some extent subsidizes it. The same mechanism will occur in the news business. We might not like it, but we better get used to it. Within ten years from now we’ll see respected online news organizations drawing half of the revenue form business-to-business type of activities. The tricky challenge will be erecting unbreakable Chinese wall between activities. Something similar to what Wall Street firms do: investment banking are separated from trading activities, they are not to talk to each other. This will require strong enforcement of corporate governance aimed at the protection of editorial independence.  It also implies decisive mindset changes in union and corporatist circles.  (In France, newspapers will be extinct long before such an evolution.)
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Another question comes up: How will hybrid news organizations stand up to pressure from financial markets? Analysts don’t like subsidized business units, even if the overall profitability is in acceptable range. Sooner or later, they come back with a vengeance, beat the stock price down until the business jettisons the unprofitable units.
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Take the Washington Post Company ($4bn in revenue in 2007, $477m in operating profits). The flagship products, the main brands are its publications : the Post itself and Newsweek. But its Kaplan Inc. unit, an education services company for students and professionals acquired 15 years ago is the big cash-cow: in 2007, it accounted for 49% of revenue (annual growth of 21%) and in 2008, it will surpass all other business units combined (publishing, TV, broadcasting).  The newspaper operation accounts for less than a quarter of the total revenue but, even if it remains marginally profitable, it is ailing. Two figures summarize the problem: in 2007, the Washington Post lost $77m in print ad revenue and got for a slim increase of $6m in online advertising. That’s a 100:8 ratio! Fortunately for the group, most its shares (60%) are controlled by insiders. But Wall Street punished the stock, it dropped by 30% in a year. Even though the group presents itself as “a diversified education and media company” (in that order), analysts sees “media” as a red flag.
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This leads to the final question: is the publicly traded form compatible with the massive shifts we are facing in the media business? As Alan Mutter reported on his blog early September, McClatchy group (stock: -78% in a year) might go private. So could do Gannett, Lee Enterprises and the New York Times Co, wrote Mutter in July. Some of these media groups combined a collapsing stock price with a heavy debt burden. Even when news media groups are not in such dire state, they all realize the label “media” (or worse “newspapers”) is stamped on their brand.  As a result, they will be punished by the stock markets — that is quite an incentive to consider a privatization. –FF
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That word again: Open

The Other Steve, Microsoft’s Ballmer, just treated us to another paean to open systems. This was last week at the Churchill Club, a Silicon Valley schmoozing institution.  There, we meet, gossip, drink, dine and watch a never ending and never boring parade of industry figures submitting themselves to soft-ball interviews by local notables of suitable rank.  (Next week, it’ll be Nokia’s CEO, coincidence, just on the eve of launching a new touch-screen music smartphone. Olli-Pekka Kallasvuo will be grilled by Walt Mossberg, the Wall Street Journal’s gadgetmeister.)
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For Ballmer, the interviewer was Ann Winblad, a respected venture investor who once dated Bill Gates, co-founder of Hummer-Winblad, one of the best Valley firms. Her genuinely inspiring life story is here, not in the surprisingly sterile Wikipedia piece.  The edited text of Steve’s remarks can be found on Microsoft’s site and if you search for “Ballmer Churchill Club” on YouTube, you’ll see bits of the Q&A session, often the more interesting part of such event.
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One the themes Microsoft’s CEO harped on was open systems, not open source, he’s not crazy about that kind of openness. Also referred to as “choice”, it is Microsoft’s mantra: With us you have a choice of  manufacturers, processors, peripherals, software.  We’re so used to the PC we tend to forget its industry has achieved the most remarkable ascent to the top of economics and culture the world has ever seen.  In three short decades it has become a trillion dollar ecosystem worldwide with Microsoft alone featuring an enterprise value of about $220 billion and operating margins in the high 30 percents.  (We thought we’d never see anything like this again and we now have Google…)
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Ballmer correctly opposes Apple’s closed control of hardware, software (and distribution) layers of its computers to the more open PC model where manufacturers offer a choice of hardware and software components thus covering a wider range of configurations, applications and prices.  Still, there is little choice outside of Microsoft Office and, for manufacturers, a PC open to both Windows and Linux installed at the factory is still verboten.  Jesuits once used what they called Holy Effrontery in defending their faith (or their power).  Never mind the contradictions, the Microsoft PC model is alive and well.  Which leads Ballmer to extend its open/closed discourse to smartphones where both Windows Mobile and Google’s Android, a nod from Steve, incarnate open choice and Apple behaves in its usual closed ways.  True again.
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But…
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There is a tricky combination of reality and perception, one that resists Ballmer’s forceful (and often very intelligent) assertions. First, for more than five years now, Microsoft’s stock has been essentially flat, a little below $30 a share most of the time.  Then we have Google.  Some call it the next Microsoft, all see its dominance of the search and advertising markets as well as its leadership in Cloud Computing developments.  This can explain the flatlining stock: for investors, even if today’s numbers are very healthy, Microsoft is no longer the king with the attendant ability to “tax” the market, to translate dominance into ever-rising profit streams.
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And we have Vista.  Never before in Microsoft’s history have we seen customers balking at the new version, Vista, and downgrading back to the older one, Xp. Today, if the effect on Microsoft’s profits isn’t clear, the impact on its credibility is inescapable.  Most of Vista’s ills are attributed to driver problems.  In plainer English, drivers are software modules that graft the many different hardware choices onto the core of the operating system.  But don’t think simple graft on a tree, connecting hundreds of delicate synapses is more like it, with many surgeons, hardware manufacturers, operating simultaneously.  Operating systems, all of them, end up with layers upon layers of additions and corrections.  The extensions and patches are needed for new versions to stay compatible with past ones and also to fix old and new bugs.  They look like Babylonian archeological digs with strata of debris marking each generation.  What Ballmer won’t say is this: the open model adds choices and opportunities; the price is higher complexity, fragility.  For Windows, the cost/reward ratio isn’t as good as it used to be when Windows 95 succeeded Windows 3.11 thirteen years ago.
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But, wait, there is more!  For all the preaching of the open/choice Gospel, Microsoft actually uses the closed model as well. I’m a man of principles, tell me the ones that the market doesn’t like and I’ll change them.  Microsoft’s game console, the Xbox?  A closed system, just like Nintendo and Sony.  The first iterations of the company’s open music players platform won’t sell against the closed iPod?  Never mind, Microsoft’s Zune is now an Apple-like platform.  Microsoft bought Danger, a closed smartphone company.  For its hardware, the Sidekick?   For its non-Windows Mobile software platform?  To build a ZunePhone?
Microsoft’s clarity of mind is admirable: it does not confuse what to say and what to do. — JLG
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Android Week

Something to keep our mind off the Wall Street catastrophe. Who knows, we might be on the verge of a “nuclear winter” as the Bush administration wakes up to another consequence of its intellectual shallowness, of its inability to understand that for markets to be really free they need to be regulated with an effective, uncorrupted police to enforce regulations.
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So, turning to saner pursuits, this coming Tuesday September 23rd, T-Mobile is slated to announce their first Android phone. What does this mean, how will this impact the smartphone market and the cellular carriers?
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Android is the name of the Open Source smartphone OS developed by Google’s engineers. What we think T-Mobile will introduce is a set built by HTC, running the Android OS and applications.  In advance of the launch, T-Mobile appears to be upgrading its network, or parts of it, to 3G connectivity.  In addition, T-Mobile plans an on-line store for Android applications, the rumor being it won’t impose the kind of restrictions Apple is known for.  In other words, T-Mobile welcomes Android developers with open arms.  Predictably, prices, handset and service, will be iPhone-like.  What appears to be not at all iPhone-like is a slide-out keyboard to be used with the screen in landscape mode.
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If all of the above is close enough to the upcoming facts, this will add a considerable amount of energy to the already lively smartphone market. Many, yours truly included, are happy to see more competition for the iPhone and his imperious maker.  As I was documenting my iPhone’s numerous crashes, one Apple individual expressed happiness: There was only one “real” OS crash, you see, the rest being processed “killed because they started to use up too much memory.” It’s a relief to know my rudely interrupted Safari browser connections or Maps searches are not real crashes.
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But, more competition is a vague phrase. Nokia has been around a long time, Windows Mobile is about 10 years old, RIM (Blackberry) too, to say nothing of Palm, Sony Ericsson and Motorola.  The iPhone has had competition for more than a year, what changes now?
Not the operator situation.  T-Mobile is a good company, with good customer service, they’re part of the big Deutsche Telekom konzern, arguably smaller but more solid than Sprint.  Curiously, neither Verizon nor AT&T, nor Sprint appear to be interested in Android.  Is it because they fear Google will have too much power on them because of the openness of the platform, because it could lead to Android VoIP applications bypassing their network billing system?  T-Mobile, in a challenger position, has no such fear.  On Blackberries, they offer what is known as WiFi Mobile Calling, that is VoIP over WiFi at home or at the office.  In other words, carriers don’t like Google pushing them towards their pre-ordained destiny: becoming wireless ISP.  Verizon talks the Open (that word again) Network talk but doesn’t really walk the walk, that is allowing anyone to bring their handset to their network.  They and Motorola got sued, and had to settle, for removing Bluetooth features allowing too much data exchange between a laptop and a phone.  Such exchange was bad: it reduced billable network traffic.  A bigger threat to the iPhone would be Verizon embracing the Android platform.
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What about the product itself?  I’ll get one as soon as possible, I already have a T-Mobile subscription. I suspect the keyboard-based UI will be well received and I’m sure we’ll see good applications on the handset, if only native Google apps, games and utilities.  The technophile is excited, and so is the venture capitalist as Android will help more applications developers make more money, resulting in new opportunities to finance interesting companies.
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And there is Google. Not the Android team, some members are ex-accomplices of mine, I admire what they do, but Google the search and advertising and Cloud Computing company.  Will Google help the still very timid smartphone advertising market?  Will a better keyboard enable more mobile applications?  For example, even as a long-time Blackberry user, I would not write this column on it.  And I won’t do it on my iPhone either.  But, will I use Google Docs on the T-Mobile handset because of its (rumored) horizontal keyboard?
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Moving to content, will the T-Mobile Android phone run all YouTube videos, will it run a version of Flash?  The iPhone doesn’t, a topic of muddled technical and industry politics debate, Apple and Adobe aren’t working too well together of late.
Still on content, imagine this: Google makes a deal with Amazon and all the Kindle content becomes available on Android phones.  Or, not at first but in a future iteration, the video downloads Amazon sells become available on Android.  And why not start sooner with the music (MP3) files Amazon sells.
You see why I’m curious.  I’m lucky, the T-Mobile office in Palo Alto is about 100 yards away from my office.  –JLG
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How the Web talks to us

The uses of Web-based lexical profiling for news and business decisions
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Every morning, Stephane Levy is poring over his “cron”, an automatically generated email that monitors a vast network of sites affiliated to Weborama, an agency specialized in behavioral analysis on the Internet. Working together with Isabelle Cabrera, a linguist lifted from the French computer lab Inria, and Rodolphe Rodrigues a PhD in physics, Weborama’s lexical profiling manager  he has has created a unique Web analysis tool. With real-time monitoring of 200,000 websites yielding 8 million unique visitors a day, “Le Lab” feeds an enormous database of usage patterns, behaviors and habits. The “Lab” performs a real-time analysis in terms of page content and request structure.  A true gold mine.
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One morning last spring, Stephane Levy (himself an computer science engineer with a math degree) looked at the previous night’s log analysis, he noted a new entry in the lexicon at the core of the system. The word “eeepc” had been flagged by the system because of a spike in the Internet search “noise”. The system decided to enter “eeepc” into the 350,000 words lexicon. The ultra-portable, netbook wave had not yet reached the Gallic shores and, even in an Internet company such as Weborama, no one had heard of the “eeepc”. With one Google search, everybody did. A few weeks later, the term became mainstream
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The experience repeats itself in various ways. Suddenly, something pops up from the Internet background noise. Here, we’re not looking at a ranking of the most searched terms, this is about occurences and co-occurences, associations of words that become meaningfull — they call it clusters.  A cluster is way more precious than isolated terms. For instance, a cluster analysis shows that a growing number of people do connect cosmetic products to health hazards and cancer.
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When Stephane Levy, along with his brother Alain (Weborama founder and CEO) discussed lexical profiling, two things struck me:
-    the potential use as an advanced probe of “what will be next” in terms of newsworthyness,
-    and the ability to perform a quantitative distinction – fact-based, no guess — between the media noise (what you read, hear and watch on your favorite sources) and the “true” noise, what people are really talking about, on a much broader scale, outside of “medias.
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Before going further, let’s set the record straight. As a journalist, I’m convinced that our biggest collective mistake is to have allowed our newsrooms to become dominated by a top-down culture: we decide what is and isn’t newsworthy today for our readers, hoping they will agree. In the last few years, the Internet, and its offspring the blog culture, has corrected this error. Even the Wall Street Journal now offers an online community to its white-collar (and now very nervous) audience. Yes, it helps to have readers yelling at you, but it will be much more useful to know, in real time, or even before they know it, what is on the masses’ minds.
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Hence the “quant journalism”. I wouldn’t go as far as Chris Anderson, Wired magazine’s chief editor, who told me last May  “If I had the opportunity to run this magazine the same [quant] way as a hedge fund, I would do it without hesitation” (see Monday Note #38). But Chris is right on one key point: we definitely should feed a measure of “quant” data into the day to day management of our news organizations. Don’t get me wrong: I’m not advocating front page content decisions based on what the “crowd” wants. I truly believe a news organization has a built-in duty of education. On occasion, the organization ought to provide information that will perform poorly in ratings, but is a component of democratic awareness.  For example, an analysis of the fiscal policies of the two American presidential candidates won’t be a hit; the same is true for an account of key decisions at the European Council.  Still, these news items must be delivered to the public simply because they are an important component of the political process. Having said that, the duty of the editorial team is clear.  It must “stay on top” of what is or is will soon be on the public’s mind. Or it, the team, will be soon out of the public’s mind.
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Let’s return to the gap between “offline” noise (media originated) noise, and “online”. The massive sample analytics techniques we just discussed are priceless. Take for instance the Beijing Olympics. European medias were filled with human rights stories, Tibet repression, etc. That’s the “offline” noise. On the “online” seismograph: zip, nada (almost). People were solely (and massively) passionate about sports performances and medals. It doesn’t necessarily mean news outlets should have lowered the pitch on political issues, but it is nonetheless actionable knowledge. You really want to help? Keep the human rights stories for a time when readers’ minds are more open.
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Just for the fun of it: Weborama’s logs show clusters of words associated with French president Sarkozy have nothing to do with politics or policies. Actually, the Internet crowd discusses his wife (the whispering singer and former model Carla Bruni) and other idiosyncrasies. For this article, I asked Stephane Levy to run a search on “Edvige”, a highly controversial police database that will record sexual and religious proclivities, among other things. The press (Left leaning, especially) went ballistic. Verdict of “Le Lab”: no online noise at all. The word had not even entered the lexicon. Does it means that media should keep quiet? You be the judge.
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Now, let’s zoom out, and look at applications for brands and business. Let’s say you are Orange. As my co-writer Jean-Louis reported last week, you are facing irked iPhone users because you are “throttling” your 3G network. Question: should you go for an expensive communication campaign or just wait for the storm to fade as you slowly upgrade your cell network? That is a several millions Euros question. Judging by the media noise, you better act fast and summon your communication agency for a brief. Now, have a look at a cookie analysis of millions visitors of 200,000 sites. Chances are you’ll see the anger is fading fast — faster than a classic media analysis leads you to think.
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Same thing if you are in the entertainment business: think about the buzz generated by a TV series targeted to a 20 year-old audience. You can’t expect a clear idea of its performance from traditional medias run by middle-age people.
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Such tools are still in infancy (Weborama’s “Lab” is merely eight months old). Again — sorry to repeat myself — I don’t think a news organization should be run solely by such methods. Unfortunately, it turns out that mainstream media are, by and large, out of touch with their audience (just look at newspapers circulation figures and audience of the evening news if you have any doubt).  More than ever, we need numbers, we need probes to understand fast moving, fluid, widespread audiences. –FF
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By the numbers (2)

An occasional look at industry data and miscellaneous other items. See the previous compilation here.
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Web monetization
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$100,0000 a day. This is the price tag for an advertiser to appear on Wall Street Journal’s home page. Rupert (Murdoch) smiles: WSJ.com can generate $100m just in ad revenue, in addition to its million subscribers.
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$500,000 a day, that’s the rate for MySpace, another of Rupert’s properties.
(Source for both: Dow Jones.)
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170 million web sites today. Just to bear in mind: in 1994, they were less than 4000.  Google is pending $2bn a year in datacenters to keep up with the growth of the internet.
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The financial crisis
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$20 trillion of debt. The Credit Default Swap market is seen as largely responsible of the current crisis. CDS are a form of insurance contract tied to underlying debt supposed to protect the buyer in case of default. The market has almost doubled every year for the past five years, reaching $20 trillion in notional amount outstanding. (Source: Bank of International Settlements in the Economist.)
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$200bn left in the Fed’s bank account. The US Federal Reserve System is running out of ammunition. A year ago, the Fed had $800bn in Treasury Securities. Taking all pledges and commitments of last week, the central bank lost three quarter of its reserve. (Source: Wall Street Journal)
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Half-billion dollars in salary. Between 1993 and 2007Richard Fuld former CEO of the now bankrupt Lehman Brothers took home this sum as a total compensation.  “That amounts to $17,000 an hour to obliterate a firm”, notes New York Times’ columnist Nicolas Kristof.
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3 pages to surrender. This is the length of the term-sheet laid out by Timothy Geithner the president of the Federal Reserve of New York and by Treasury staffers in Washington, to take control of the insurance conglomerate AIG. The document was hand delivered to AIG head office.  (Source: WSJ) –FF
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From superblog to “Internet newspaper”, the lessons of the Huffington Post

What’s so special about the Huffington Post? How come that what started as a political blog three years ago now epitomizes the “superblogs” threat to mainstream media? And, perhaps more important, what causes a blog to mutate into something now perceived as a mainstream media — and do the economics work?
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From a content perspective, the “HuffPo” is far from mind-blowing. Basically, it is third party content mixed with opinionated blogs.  The whole thing, thanks to Arianna Huffington’s address book, is topped up with high-profile bylines. The founder of the Huffington Post is a well-connected woman, prolific commenter (first on the right, then left-leaning after a divorce from a Republican congressman). She ably enrolled intellectuals and entertainment stars into a flashy blog system positioning itself as a counterpoint to the Drudge Report and others conservatives blogs. When compared to traditional online media, the packaging is aggressive: splashy headlines, an ever-changing home page.  Internet recipes for success have been well internalized. No Pulitzer Prize material, though, even if the HuffPo lands scoops here and there. By journalistic standards, pure players news sites such as Slate or Salon are much more diversified and thorough.
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But, in these days of heated politics, The Huffington Post is THE thing to click on. This fall, it has raised another $5m for an unspecified share of the company from Softbank Capital and others.  The raise boosted its valuation to an estimated $40m-$60m. Not bad for a blog, even a big one (the total raised now tops $10m). In terms of popularity, Technorati puts the HuffPo on top of its list, ahead of the galaxy of tech sites such as TechCrunch, Gizmodo or ArsTechnica.
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Let’s look at the empirical strategy evolved by the Huffington Post. In May 2005, the site wants to drill into the political niche.  To do this, it relies on Arianna’s network as well as her ubiquitous media presence made even more notable by her thick Greek accent. It worked fine. In 2006, she’s on the list of Time Magazine’s most influential people (the kind of thing that helps one’s business). That’s lesson #1: if you want your little venture to rise from the blog-swamp, have a prominent and credible figure appearing on other medias.
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In the meantime, the HuffPo acts pro. It hires good editors, ones able to organize the prattlers and stimulate the hungriest crew members to unearth exclusive stories. That’s lesson #2: editing is key. Too many blogs crumble under uninteresting user generated crap (a.k.a. LGC, Loser Generated Content). Comments are fine – if and only if they add something both piquant and relevant. Therefore, old media know-how is precious. Earlier this year, in the New Yorker,

the Huffington Post is depicted as a new kind of competition to established media.  In the piece, the author exposes the HuffPo relationship to the press, and the way Arianna takes advantage of the dead-tree blues:
“The Huffington Post made a gesture in the direction of original reporting and professionalism last year when it hired Thomas Edsall, a forty-year veteran of the Washington Post and other papers, as its political editor. At the time he was approached by the Huffington Post, Edsall said, he felt that the Post had become “increasingly driven by fear—the fear of declining readership, the fear of losing advertisers, the fear of diminishing revenues, the fear of being swamped by the Internet, the fear of irrelevance. Fear drove the paper, from top to bottom, to corrupt the entire news operation.” Joining the Huffington Post, Edsall said, was akin to “getting out of jail,” and he has written, ever since, with a sense of liberation. But such examples are rare.”
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At this stage, in its well-crafted buzz, the Huffington Post distillates its new status: it is no longer a blog, but an “Internet newspaper” – a reference knowingly targeted at a slow-moving advertising market. It has extended its editorial footprint in new territories: business, media, entertainment, lifestyle. According to its management, politics account now for the half of its content (but much more when it comes to its audience). Enter the economics attached to the evolved status:  the key difference between the  HuffPo and the rest of the blogosphere is on the business side. And this is perhaps the main component of its transformation into a true mainstream media. Here are some key figures:
-    Staff: about 45 (a significant, large number)
-    Annual costs of operation: about $4-5m (the HuffPo doesn’t publish figures)
-    Break-even is “expected this year” (I love this type of statement, one of the most common lies in the business world, right there with “the check is in the mail”)
-    Money raised: $10m, mostly from Softbank
-    Valuation: between $40m to $50m, if the blogosphere is to be believed
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Of course, audience is the main ingredient in assessing the value of a site. Welcome to the wonderful world of Internet economics. Ten years after Google’s birth, medias on the Internet are still unable to agree on reliable metrics to measure visits to any given site. In the print media, a comparable example would be the Wall Street Journal claiming sales of two million copies a day while audience boutiques would peg it a million or so. Guess which dataset advertisers would use to adjust the price they’d be willing to pay?  This is exactly what is happening on the Internet. As far as the Huffington Post is concerned, its internal measure gives 8m unique visitors (UV) a month. But Nielsen Net Ratings grants it only about 4m UVs. For the HuffPo and most websites, true audience measurement is a guessing game.  The numbers depend upon whom you pick between Nielsen, Alexa, Quantcast, Compete, even if you use only one of these tools for all your measurements, you’ll end up nowhere since some sites are better tracked by one or the other.
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The situation is somewhat paradoxical (to put it gently): websites are born with ways to count visitors. Hits on servers, logs, compiled by traffic analysis tools give a detailed view of the audience: how many people are visiting the site, what they look at, for how long, where do they come from, and so on. Compared to the print press, which laboriously counts its sales and rely on quarterly polls for readers’ profiles, it is a dream come true: instantaneous, accurate, and crunchable to the extreme. Whoever has spent half an hour tinkering with Google Analytics will agree: such tools are a fantastic way to stay in tune with your audience. But it was too good to be true. A conjunction of conservative laziness in the media buying agencies and powerful lobbying by Nielsen (they already measure television audiences) settled the issue: The ad market would superbly ignore the tools embedded in websites.
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Instead, the market would go for a truly mediocre measurement system based on Nielsen’s evaluative panels of Internet users (it is called “user centric”, as opposed to the “site centric” for the computerized tools). Just to get an idea: its French panel has 6000 users (they get special tracking software), for a market of about 35m users.  This explains why, for the Huffington Post like others, audience is imprecise by a ±50% margin of error — at least. Of course, the ad market turns around and invokes this very uncertainty to put further downward pressure on prices. This explains why an Internet user yields only one-fifth or one-tenth of the revenue generated by his paper counterpart, even though the Internet audience structure is much better known and is tracked in real time. It remains quite a mystery to me why publishers have not lobbied harder for an audited site-centric measurement.
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Let’s get it straight: as long as we can’t rely on a unique, credible Internet audience measurement, websites economics will be wobbly and prices won’t reflect the true value of audiences. That situation makes assessing the current status and the  future of superblogs (more than 1m UV a month) a difficult task. And forget about valuations: whether it is based on (often negative) EBIT or revenue, the “multiple” for any transaction will continue to lack any solid basis in fact.
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What’s ahead for the Huffington Post? It could break-even this year, thanks to the election. Afterwards, two factors will influence its future. The first one will be its editors’ ability to keep the politically addicted coming back to the site. Sounds trivial but it’s a matter of resources, i.e. number of reporters the HuffPo will be able to line up. Consider this: during the Democratic convention in Denver, more than 500 bloggers were accredited. On the top tier, the Huffington Post had 20 people, Talking Points Memo (a remarkable superblog to follow the campaign) had 9, Salon.com 9 also and Slate 7. Apart from this, Politico,
which was also producing a newspaper, had 40 people under the Big Tent. This shows two things: first, it takes a fairly big staff to cover big events (nothing new, I agree). Two, — and more worrisome from a business perspective — the blogosphere is heavily fragmented.  At the Democratic Party convention, the n°1 superblog had only 1/25th of all registered bloggers.
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For the future of the Huffington Post, the second critical element lies in its ability to capitalize on its diversification. For now, most of its traffic goes to the political content. Channeling audience to other parts of the site won’t be easy.  It is one thing to rise above the crowd in a specific, news intensive domain such as politics; it is another story to do achieve the same rise when covering a much wider array of topics.  Many more competitors, and stronger ones, could lead to a dangerous cost escalation.
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Jumping from a nice, enjoyable niche business to a mainstream one inevitably collides with economics. Just one final data point to assess the situation: the Huffington Post requires an annual revenue of $4m to $7m to break-even, right? Now this: just to maintain its Bagdhad bureau, the New York Times will spend more than $3m in 2008. Comments and content aggregation is inexpensive, but news remains a very, very cash-intensive business.  –FF
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A second look at 3G

by Jean-Louis Gassée
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Revelation or revelator?  I’m referring to the iPhone, of course. We’ll quickly skip over the revelation part, enough praise (and some well-deserved barbs) already.  Instead, we’ll look at the light the iPhone sheds on the cellular infrastructure and on the culture of operators.
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The symptoms: spotty 3G coverage, bad reception, ‘bandwidth’ (meaning download speed) far from the “twice as fast” claims, poor battery performance.  To say nothing of software reliability complaints.  Add Apple’s lofty claims and relative inexperience in cellular telephony and you get a nice target.  As the French like to say, the higher the monkey climbs, the more people see his… mistakes.
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This being America, we now have three lawsuits broadly accusing Apple and AT&T of false claims. At the same time, the chattering classes, read the blogosphere and the aging MSM (Mainstream Media), promptly filled up with comments, explanations and accusations.  More confusion than light.
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Apple first clammed up in its usual imperious style but, soon, emails from Dear Leader himself leaked out.  Steve Jobs replied a couple of customers, acknowledged the contribution of software bugs to battery and connection issues and promised fixes in September.  All along, the company refrained from implicating carriers.
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However, as more facts emerged, we began to see a different picture.
The magazine Wired conducted a nationwide study that pointed the finger at the carrier, AT&T.  Then, a Swedish lab took it upon itself to test the iPhone reception (story on Cnet and in the Göteborg Posten), comparing it to leading 3G handsets.  The result?  With regards to radio performance, the 3G iPhone was indistinguishable from Nokia or Sony Ericsson handsets.
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Then, it transpired that Orange, in France, was ‘throttling’ the 3G iPhone. Throttling?  Here the word refers to Orange deliberately limiting the transfer speed, the bandwidth provided to iPhones to 384Kbps (Kilobits per second), which seems to be the ‘legal’ minimum of the ITU (International Telecommunications Union), not the 1Mbps or more ‘sold’ by the carriers.  [I went to the ITU site and entered 3G in the Search field.  The answer is: “The component required for this action is not available”.  This in both Simple and Advanced search.  Fortunately, Google provides the usual abundance of links and things become even less clear.  Regarding the 384Kbps number, some interpret it as the maximum rate for slowly moving devices, such as a handset carried by a walking user.  Others quote the IMT-2000 standard and ominously remind us: “The total max bandwidth of 2.4 Mbits are to be shared by all users within a single cell sector. One cell normally has 3 sectors to cover the full 360 degrees area around a cell antenna tower”.
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Confused?  Let’s step back a bit.
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When we look again at the Orange item, one implication becomes explicit: the network knows it is serving an iPhone.  A dialog, a protocol sets up the connection, identifies the phone/customer for billing, etc…  The “etc” part is very sophisticated as it allows the network to regulate the phone’s radio power, for example, no need to “shout” if the cell tower is near.  This, in turn, points to the ‘client’ side, to the iPhone’s role in the protocol.  Hence the acknowledgement by Apple of connection and power management bugs, hopefully corrected by this past Friday’s 2.1 update.  (I installed it and have nothing useful to report yet – which could be good news.)
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On the carrier side, a set of facts emerges. To begin with, carriers weren’t prepared for the iPhone, because it isn’t really a phone, it is an Internet device with a phone thrown in.  As noted here before, Google found that the iPhone provided 50 times more search traffic than the next smartphone down the list.  In the past, carriers touted smartphones as having browsing and multimedia messaging capabilities but these were hard enough to use to be hardly used.  The iPhone comes in with the first real smartphone browser and the naïve customers use it.  So much so that the network buckles under the load or, in Orange’s case, tries to survive by spreading the penury.  (In recent statements Orange appeared to promise to be back at 1.5Mbps “in September”.) See also how iTunes wireless download are only allowed with a WiFi connection, not 3G.
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So far, carriers have managed to maintain an oligopoly, a market with a very small number of suppliers. Economic theory holds an oligopoly suppresses real competition and leads to various forms of implicit or even active price fixing, as we’ve seen in France.  The lower level of competition allows carriers to delay investments and ‘milk’ their network (and their customers) just like the good old cable networks operators.  In downtown Palo Alto, the birthplace of Silicon Valley, there still are ‘white spots’, places where you have No Service.
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In keeping with the carriers’ culture, we see a combination of small print and outright misrepresentations of services.  Summarizing: your payment is mandatory, our performance is optional.  No wonder ‘trial lawyers’ are rising to this tempting occasion, this after courts started taking another look at the dreaded
mandatory arbitration clauses
carriers use to prevent disgruntled customers from seeking redress in court.
This is unfortunate.  Cellular networks are wonderful, when they work.  The voice and data services they strive to provide make our lives more productive, more fun and emotionally more connected.  (I know, there are also terribly annoying and dehumanizing uses too.)  For the technically curious, wireless networks are both admirable and ugly, an ever evolving patchwork of high-tech bits and pieces striving to appear seamless.
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We can only hope regulatory authorities will pay more attention to the gap between what carriers promise (and ruthlessly charge for) and what they deliver. As for the tall markitecture tales of 4G networks, today they’re just a way to move the debate away from today’s shortcomings by touting a bright future. –JLG
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By the numbers. And what do they mean for our industry

This is the Fall season of business plans for the coming year. The numbers will mean pain for the media industry. Below is a set of facts and figures to keep in mind when considering newspapers, advertising, search, mass collaboration… and coffee.
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The newspaper industry’s overall condition
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80% gone: Within the last 12 months, the market value of newspapers groups such as Gannett and McClatchy went down by 80% or so. The New York Times lost 70% of its market cap during the same period, closing Friday at $13, lowest in ten years.  Monthly figures are not encouraging either: the New York Times Co.’s revenue (including the International Herald Tribune and the Boston Globe) dropped by 10% from a year earlier. Advertising sales are down by 16% and circulation revenue slipped by 0.5%. Classified (jobs, cars, real-estate) are down 30%.  For Gannett and McClatchy, ad revenue losses are accelerating, approaching the -20% zone for the past twelve months basis. Even News Corp has seen its value erased by 40% since Rupert Murdoch bought the Wall Street Journal. (Alan Mutter is tracking those numbers in his blog)
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What it means: two things. More newsrooms layoffs, more consolidations.  For the latter, consolidations, the weightiest — and yet quite unlikely – would be the acquisition of the New York Times by Murdoch. As reported by Michael Wolff in Vanity Fair’s latest issue, Murdoch keeps crunching numbers in contemplation of such a move. (One of the assumptions is merging the back-office operations of the Times and the Wall Street Journal). Europe won’t be spared by massive restructurings, not only slashing the editorial meat (the easy way), but also by repositioning newspapers and changing revenue models.
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IPhone & mobile browsing
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$1million a day. That’s the gross revenue for iPhone applications sold through the AppStore. Apple reported 60 million downloads of applications for the iPhone, just one month after the opening of the AppStore (source: Wall Street Journal, Aug. 11). Apple is getting “only” 30% of this revenue. Still, this market, potentially $1bn a year, didn’t exist three months ago.
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+58%. IPhone browsing has increased by 58% from July to August as reported by Market Share (the 3G version was launched July 11).
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What it means: the mobile Internet is finally gaining traction. By the end of the year, several competitors (Nokia, RIM-Blackberry, Android) will join the fray with powerful and user-friendly browsers. We foresee another steep increase in mobile browsing after the holiday season. 2009 could be “the” year for mobile browsing.
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140 million users of mobile social networks by 2013. According to ABI Research, the next big thing is mobile access to social rings such as Facebook or MySpace. ABI might be right judging by the number of people who got the Facebook app on their iPhone.  The exact number isn’t known but this app received the highest number of reviews of all iPhone apps, more than 2030 reviews, compared to a couple of hundreds for the next one down the list.
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What it means: even though social networking has yet to become a channel for news delivery, it is the medium of choice to reach young people. Facebook, MySpace and others are used by:  85% of online and mobile active users from the “Generation Y” (born after 1979);  71% by Gen X (born  between1965-19789); and 59% by Baby-boomers (born between 1946-1964). (Sources: Pew Research and eMarketer)
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Advertising
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24.4 million downloads of the ad-blocking plug-in for Firefox, a 10 times increase in one year. It is by far the most popular add-on this browser. This yields only 5,4 million daily users but their number is growing fast and a rate of half million download per day can’t be ignored. (Source: Mozilla.org)
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What it means: sites should think twice before before inundating their home page with invasive and poorly executed advertising. Those are incentives to use to ad-blocking software.
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42% of all online ad spending goes to search ads, and the proportion is growing. According to this eMarketer 2008 estimate, display ads spending will remain flat. (In fact, the percentage share will decline, since the overall online ad market is still growing at a healthy 20% in the US).
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What it means: keep that in mind if you are in business plan or website redesign mode (make room for Google Ads rather than for big banners).
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Search and News
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83% of people reading news on the internet use search engines to find stories of interest, even though they land, most of the times (51%), on a news brand they know (small consolation). The proportion was 70% in 2004, it is reaching a new plateau. But the intensity of search engines use is still growing: in 2004, 19% admitted using a SE three times a week; this proportion is now 31%.
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What it means: search engine optimization is definitely a “must” investment. No doubt. A good SEO person in an e-newsroom quickly pays for his salary.  As far as Search Engine Marketing (keywords acquisition) is concerned, this is a different story. Some news sites (such as Le Figaro in France) are racking up great ranking thanks to a massive investment in keywords. Viewed from an Excel perspective, it does work — in the short run. But there is still no model showing how a site that relies heavily on keywords purchases actually keeps its audience. It’s dope, you’re high for a short time.
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700 to 1000 Google computers are used to execute a single search (when you hit the enter key). In a split second (113 million results for ‘léonard’ in 17 hundreds of a second), a Google-brewed software called Map Reduce slices up your request, distributes it among its million servers and sends back results. Google invests about $2bn a year in datacenters.  For this, the company buys up land across the world on one condition: as traffic grows, it must accommodate a new building within six months.

What it means: theses numbers are just a glimpse at Google’s unparalleled power. The latest iteration of Google’s drive for more power is the new browser Chrome (see Jean-Louis’ column below). But it is not the last. Google wants to index the world, from 32 million books listed in libraries worldwide to your voice-print if you call its phone directory, or street views (readable text included) of your town. Now, Google must be taken into consideration while planning for any information system.
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Long tail true stories
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90% of Netflix’s catalog (the American DVD rental store) is rented at least once a month. And nearly two-thirds of the movies are rented thanks to a recommendation generated by the site itself.
MSNBC uses a cookie to keep track of the 16 articles recently read and uses automated text analysis to predict what news story you’ll want to read. (Source: Super crunchers by Ian Ayres)
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What it means: social recommendation engines and collaborative filtering works. They help revive inventories, movies or news stories. OK, this bruises the charming notion of serendipity. But keep this in mind: a ten-year old newspaper publishing an average of 50 stories a day built a stock of 150.000 articles to dig in.  Next, consider that online papers have between 3 to 5 pages views per visits.  An optimized delivery system for related stories makes a huge difference in revenue.
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10 million subscribers for Safaricom, a Kenyan mobile phone operator. Interestingly, when Vodafone bought a stake in this company back in 2000, the first version of the business plan bet on 400,000 users max. It got 25 times more. Among things other than good service and good pricing, Safaricom encouraged new uses such as transferring money. Working with Barclays, Standard Chartered and Oracle, Safaricom created M-Pesa a mobile phone cash-transfer system, now a quasi-bank. Safaricom is a profitable $1bn company (read its CFO interview in Kenya business daily).
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What it means: new (big) businesses can emerge  from unexpected applications based on existing platforms.
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Wiki dynamics
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1.7 minutes. This is the time it takes to see an obscenity removed by the editors of Wikipedia, according to the MIT. Nature magazine took a sample of 42 scientific entries and found 3 inaccuracies in Encyclopedia Britannica and 4 in Wikipedia. One big difference: on Wiki the new, corrected edition, is just minutes away. (Source: Wikinomics,  by Don Tapscott and Anthony D. Williams).
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What it means: the idea of full-of-crap wiki systems is dead. Fact is: due to its contributive structure, Wikipedia is a fairly accurate tool. On a purely statistical basis, editors and publishers should not be afraid of setting up Wiki-information systems for news-related topics. Today’s reluctance lies in our culture, not in the cost column: Wikipedia has only five full time employees.
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Water consumption
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840 liters of water to produce this article. That’s about the eco-footprint of the six cups of coffee I drank writing this note. Each 125ml cup required 140 liters of water to grow and process the beans. Stunning, isn’t it? And that’s nothing compared to 16.000 liters (yep, sixteen tons of water) to produce one single kilogram of beef. By comparison, the computer industry is downright frugal with only 32 liters to produce a 2gr microchip. How does it relate to the news business. Uh, it doesn’t. (Source:waterfooprint.org). –FF
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Google Chrome: a new OS War

Not browser, OS.  More about that in a moment.
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But, first, our kind, venture capitalists, loves disruption. When the established companies take too much room on the Petri dish, there is no way for a new bacterium to prosper.  When a Microsoft dominates a market, to pick a random example, launching a competitor becomes prohibitively expensive.  We love to see the economy move to virgin territories or to watch technology (or the law) weaken dominant players.
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So, what’s not to like about Google’s new browser possibly weakening Microsoft’s position?  Possibly again, we could be trading one Microsoft for a new one, Google, for another black hole of a company sucking in all the business models coming into its orbit.

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With this out of the way, let’s take a closer look at Chrome.
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f you have the time and inclination, you might want to read Steven Levy’s story in Wired, or CNET’s shorter but insightful article, Why Google Chrome?  Fast browsing = $$$$.  I also like Niall Kennedy’s blog post: The story behind Google Chrome and, lastly, a refutation of the unavoidable conspiracy theories: When does Google Chrome talks to google.com? As I write this, a Google Chrome search returns close to 13 million results…
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Back to the OS question. As early as 1994, Marc Andreesen, of Netscape fame, said The browser is the OS.  Many, yours truly included, thought the statement was both technically flawed and self-serving: Marc was one of the authors of the Navigator browser.  In 2008, Sergey Brin repeats the mantra.  Like Marc, he’s technically wrong but existentially correct in the most important of ways, the ways of business wars.  Like Marc, Sergey knows the role, the power, the weight of the (now) underlying OS.  The operating system juggles tasks, manages hardware and software resources such as memory and input/output devices.  With processors executing one instruction at any given instant, the operating system manages the illusion of many concurrent activities, downloading videos, getting email, Instant Messaging, playing music and getting pictures out of a digital camera.  For the applications programmer, the OS is the genie right under the water’s surface.  Wherever the coder sets foot, the genie is right under there, making sure the techie walks on water.
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And, ask Microsoft, not if the OS matters, but what happens when OS trouble happens, when Vista misfires.
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But Mark and Sergey are right, we have entered a new era, Cloud Computing and yet, the lessons of the desktop age are not forgotten. Going back to the application programmer’s feet staying dry, Microsoft played and won the game of tying the OS and the applications.  Windows programmers make sure Microsoft Office programmers have what they need.  Sometimes, this happens at the expense of competitors who can’t always have access to the same technical information, either at all, or in a timely fashion.  At the very start of the Internet era, Microsoft sees what they need to do, again, tie the browser and the OS.  This gives Microsoft control of Internet applications because these need to comply with the dominant browser from the dominant OS and office applications supplier.  Internet Explorer, free and tied, kills Netscape Navigator.  Microsoft spends time and money in various courts around the world but appears to have won that battle.
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But, in September 1998, Google starts and quickly rises to its dominant position in search and advertising. In parallel, a non-profit foundation, Mozilla, resurrects Navigator as the Open Source Firefox browser.  Most of us like Firefox: free, good and getting better with every version, available on Windows, Linux and Macs.  Not tied to Microsoft or Apple.  In our happiness, we paid little attention to Mozilla’s ties to Google, financial ties, millions of dollars, $66.8 millions in 2006, to be exact.  A 26 percent increase over 2006, with little reason to think the progression stopped in 2007.  That revenue is mostly referral money generated each time we use the Google search box in Firefox.  In other words, Google cleverly financed a Microsoft (Explorer) and Apple (Safari) competitor.  A successful one: recent browser statistics credit Firefox with 43.7% share versus Explorer versions totaling 50.6%.  Too successful, perhaps.  Assuming more than $80 millions paid to Mozilla for “traffic acquisition costs”, a fraction of that easily pays for the engineers and parasites needed to write decent browser code.  That would be a make vs. buy argument.  And that would be the wrong one.
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Google’s decision to ‘roll its own’ is based on the strategic requirement to provide its Cloud Computing applications with their own, controlled, under the water genie. Cynics will say Google is playing the Microsoft game of exacting monopoly profits by tying the new OS, the browser, with the new era applications.  But, there are several twists to that analogy.
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First, Chrome is an Open Source browser. Anyone can inspect and use the code for their own work.  In the first place, Chrome is based on the Open Source Webkit also used by Apple’s Safari.  One significant improvement brought by Chrome is the V8 Javascript rendering engine.  Anyone can take the code and use it in their own work – as long as the Open Source licensing is enforced.  Will this cause Apple or Microsoft to Open Source their browsers?
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Second, focusing on Javascript, Google makes another strategic decision, a good one in my view. Over time, browsers have become more complex as they need to deliver richer, livelier applications ranging from spreadsheets to games, from video to music or PDF documents.  Adobe now promotes a platform called AIR, working ‘above’ all desktop OS and purporting to be the engine of choice to deliver ‘Rich Internet Applications’, their words for Cloud Computing.
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Not to be left behind, Microsoft comes up with their own ‘cross-platform platform’, Silverlight for the same new era target. There’s even a third-party Silverlight version for Linux being developed, with some difficulties, by a Linux advocate no less.  Why would Novell’s VP of Engineering, Miguel de Icaza help Microsoft?  I forgot, Microsoft just bought another $100 million of Linux ‘support vouchers’ from Novell.
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Now, if you are Google, will you let Adobe or Microsoft design and constantly modify the genie under the water for your Cloud Computing applications?  Not if you want to control your destiny, not if that destiny is to ‘lead’, to stay Number One.
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Javascript’s it is and we have our own V8 engine for it.
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Today’s beta version looks good to some, and is panned by others. As the new fashion of perpetual betas dictates, see Gmail, we can expect a steady stream of improvements.  More interesting will be watching if and how Google plays the tying game, how it uses Chrome to give its email or photo editing programs features not available on other browsers or speed they can’t match.  And if, how Google one day manages to make money with these applications, the old fashion way, by charging real money for their use.  We VC would like to see that.  For us, ‘free’ is a four-letter word. — JLG

Learning from the Obama Internet machine

From the very beginning, the Obama campaign met the standards of modern entrepreneurship: a clear goal (get to the White House), a strong leader (Barack), a simple pitch (Change) — and it needed cash, lots of it. And, unlike the Iraq war, it had a preset deadline, the close of business Tuesday November 4th. Not an IPO’s variable price, but a binary ending: either a milestone in modern History or a hard, highly visible failure.
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Before we go any further, a few facts:

  • $401million raised by the Obama campaign – so far.  ($245m  for Hillary Clinton, and $171m for John McCain).
  • $200 million from the website alone (as of June 08)
  • $45 million were raised on the web in February alone
  • > 1 million user accounts on My.BarackObama.com
  • 75,000 local events organized through the site
  • 2 million phone calls originated from the site
  • $4 million have been invested (so far) in the site, including 1.1 million for Blue State Digital and about $3m for Google
  • 38 million people watched Barack’s acceptance speech at the Democratic Convention in Denver (YouTube viewership not included).  A new record.  This is more than the Beijing Olympics opening ceremony.  In 2004, Kerry got 24 million viewers and GW Bush 27.5 million
    4 million people watched Obama’s March 18th speech on race on YouTube
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Based on revenue, return on investment, popularity, penetration rate, brand recognition and any other business indicator, Barack’s Internet operation, MyBO (MyBarackObama) is a roaring success. For our humble media business, are there are lessons to be drawn from this incredible (but retroactively logical) ride? After all, we, too, live on popularity and meeting financial milestones.
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Lesson #1: extract the best of a social network application. Above all, MyBO is a barebones version of a Facebook or a MySpace, focused on two goals: money and message. A detailed look shows how every single feature is designed in accordance with those goals. On the Obama social net, you give the minimum of yourself: you don’t share you tastes in music or reading. But you’ll find all the tools needed to fulfill your dual mission.

You want to organize a door-to-door campaign in your neighborhood? Everything’s there: scripts, ready-to-print flyers, and even video footage of the Illinois senator to be transferred on a DVD for handouts. You feel like throwing a fund-raiser on your block? Set up your fundraising page in a few clicks, assign yourself a financial target, a nice thermometer will track your results.

I spotted a group close to a place I used to live in New York (postal code 10011). I see “Downtown West Side Manhattan for Obama”, as it is called, counts 113 members, hosted 812 events, placed 10,722 phone calls, and raised $59,631.06. That is $527 per head. Not bad. Better that “Chelsea4Obama”, a few blocks north, yielding a mere $358 per member. You can track, compare, and peek at all the 8000 groups created that way. This amazing machine explains how the Obama campaign is able to raise two million dollars a day at its peak performance.
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Lesson #2: Reward, involve, empower. In a YouTube video a black, middle-class woman summarizes the general feeling: “Grassroots Financial Committees mirror Senator Obama’s broader mission, [that is] people owning a part of the campaign and later, a part of the government…” Simple as it sounds, this view echoes the feelings of hundreds thousands of volunteers, donors and fundraisers: being part of the action now and after the election.  And doing it the fun way, because everything in the Obama site is designed to link, connect, share, stimulate and finally reward its contributors, no matter how modest.
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Lesson #3: Don’t improvise, execution is key. No tinkering in the Obama site (unlike John McCain’s). It is engineered by pros, in that instance a small company called Blue State Digital, founded by alumni of Howard Dean’s 2004 campaign, the one that marked the first real debut of Internet fundraising.

Early 2007, BSD picked up some of the best skills available in the social networking space by hiring Chris Hughes, a co-creator of Facebook. Interestingly enough, the 24 year-old gent is not a techie. He majored in history and literature at Harvard and he’s responsible for many non-nerdy features of Facebook such as its privacy policy. Speaking of it, MyBO is fully loaded with all the state-of-the art tracking systems you can think of. To sum up, all members are now part of a big database, a pollster’s dream-come-true. Equally important is the high-level involvement of the Internet operators: at the Obama campaign, a BSD partner attends all senior staff meetings.
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Lesson #4: Use Best-of-Breed interfaces and tools. Donating to the Obama-Biden ticket is roughly comparable to the One-click purchase on Amazon. You can even donate few dollars every months, and pay through Google Checkout.  Spreading the message relies heavily on always precise and relevant SMS, as well as social networks messaging.  No phone banks, this is for traditional (read old folks like McCain) campaigns. Calling for donations is decentralized and organized through the site (two millions calls placed so far). Blue State Digital has created a broad set of tools specially designed for political action, the ultimate form of promotion — and petition.
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Lesson #5: Find the right balance between top down organization and anarchy. Of particular interest is  how the system is both directive and self-reliant. On MyBO blogs look (and are) true blogs, but it also looks like the organization’s gestalt instinctively directs, disciplines content. The site’s architecture and the ways tools work all converge towards providing clear direction. (I suspect a powerful monitoring system is working behind the curtains as well).
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Lesson #6: TLA (Test, Learn & Adjust), more than ever. Once the basic infrastructure (one capable of handling massive traffic) got up and running, MyBO switched to constant improvement mode. One large scale instance of the test and learn approach: a year ago, the staff introduced a point system to track member activity. Three points for a phone call, fifteen for hosting an event. Predictably, people started racking up points for the mere sake of it, regardless of actual impact. The system needed adjustments. Early August, MyBO rolled out an upgrade called the Activity Tracker. It replaced the brute force point accumulation with a more detailed breakdown of activities: Events hosted,  Doors knocked, Number of blog posts, Calls made, Groups joined, and of course, Dollars raised. To encourage sustained effort, another dimension was added: the Activity Tracker became time-sensitive. The more recent the work, the higher the member’s Activity Index becomes. Of course, all of the above happens in everyone’s full view, thus creating peer pressure. This is just one example. Over the course of the campaign, many such features were added, modified or dropped.
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What’s lies ahead. The Monday Note will stick by its December 24′s predication: Barack Obama will be elected. Now, one of the most interesting features of his presidency will be how all the lessons gathered while operating MyBO will be translated into a powerful public governance tool. No doubt that Blue State Digital will work on it soon.  How an Obama administration balances grassroots induced policies with the bulky (but essential) legislative apparatus is sure to be closely watched by all mature democracies — as well as big corporations.  –FF

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