March 11, 2008 : a new era in the internet advertising sector

The European Union had the power to prevent Google’s acquisition of DoubleClick. Last week, the regulator unwittingly set a milestone in the history of the Internet. They greenlighted Google’s absolute supremacy over Internet advertising, a position comparable to Microsoft’s domination of PC operating systems, Windows, and applications, Office. To get a fresh read of the kriegspiel, Monday Note spoke last week with Alain Levy, CEO of Weborama a fast growing player in the European internet ad sector. Some excerpts follow:

On the EU’s motives for approving the deal, Alain Levy : “European regulators undoubtedly performed a very thorough investigation before making their decision. They sent us a detailed questionnaire; however, it was limited to pure competitive considerations. Issues such as privacy, the protection of personal data, where not addressed. To me, these remain key questions. Microsoft’s attitude contributed to the outcome : first denouncing the deal as the quintessence of anti-competitive behavior, and then bidding for Yahoo. In doing so, Microsoft killed most of the arguments against the DoubleClick acquisition. It is quite possible Microsoft had a clue about the upcoming decision of the EC”.

On the monopoly issue and consequences for others players: “…I can’t think of a better definition of a monopoly than the new position assumed by Google in the ad-serving market. The tremor will be felt in many areas. Google will control critical parts of the business. Advertisers will lean to go with them more than ever. Agencies will be squeezed by Google’s propensity to talk directly to advertisers. I don’t buy Eric Schmidt’s [Google's CEO] statement about its willingness to preserve the brand-agency relation, we already have many indications that they will do exactly the opposite [see below].

Even the rules of merger and acquisition will be effected: “…Thanks to its unprecedented access to market data — CPM, market share, revenue structure, demographics — Google now has the ability to assess in an instant the value of almost any player in the market, on the ad side, as well as on the publishing side. This is a decisive advantage when looking at potential targets, especially with a current market cap of (still) $137bn… Conflict of interests are lurking everywhere — especially in a totally non-regulated business. Today, all media companies and communication groups — internet and non-internet — are thinking: How do we position ourselves, how do we adjust our strategy in light of this acquisition?”.

Is there still room for independent players ? “…Oh, yeah! More than ever, actually. From now on, any brand using Google’s ad serving does, in fact, give up its entire inventory; those who work with Google for media buying deal with someone controlling 40% to 60% of the market. And advertisers who are already DoubleClick’s clients become totally transparent for Google. In such an imbalanced environment, yes, we have a lot of room to grow”.

Further readings :

These figures are amazing : every month, for each visitor, Yahoo collects marketing data 2520 times ! For My Space, the figure is 1229 times, for Google: 578 times, the New York Times, only 45 times per visitor and per month. This also shows what’s really at stake with the Microsoft/Yahoo battle : Yahoo is able to get data on 400 billion events per month, Microsoft only 51 billion.
> This article in the New York Times, reveals the depth of advertising-related data sites are able to harvest.
> and here on NYT Bits

Here is why the entire advertising food-chain has good reasons to be worried : “Google’s strategy is to have advertisers load their entire ad budgets into Google’s system, which would allocate spending across media whether online or offline”. Says who ? Tim Armstrong, Google’s president for advertising.
> more here

Google waited no more than three days after the decision of EU regulators to launch its Google Ad Manager. This is a crystal clear indications of Google ambitions : sterilizing the market, not with Microsoft-like intimidating practices, but simply by giving for free what others will charge. For Google, giving away some ad serving features is simply a way of generating new streams of cash. Thanks to its gigantic infrastructure, the “price” of the gift is marginal. And for the site publisher, choice between being limited to a midsize Ford for free or paying full price for a Saab is simply a no-brainer. As for Google Analytics that gives access to powerful traffic tools for free, Google Ad Manager will prove to be the lethal weapon to capture market share.
> see how Goolgle it works How big Google display advertising business could be ?
>Here are some answers.“There Will Be Blood” : collateral damages will be serious in the wake of the DoubleClick acquisition.
>read some self-explanatory quotes of Google’s CEO Eric Schmidt in Silicon Alley Insider. and a more PR polished version, his interview in Portfolio.

Quick Links from Monday Note #26

Magazine — The Wall Street Journal to launch a glossy

Rupert Murdoch is joining the pursuit: big ad dollars in glossies. The Anglo-Saxon market is crammed with such magazines (Condé Nast’s Portfolio, Robb Report, FT’s How to Spend it, The Economist’s Intelligent Life, etc.). For the Wall Street Journal, it is a logical step : the average household income of a WSJ subscriber is $253,000.

> this story in the Washington Post explains Murdoch’s strategy about synergies. His message to the Journal: We don’t want to cheapen your brand.

Social Networks — FT courts students via Facebook

The Financial Times is launching a new application that will give student access to FT.com. They will be able to apply for a free subscription for a maximum of four times. Nice bargain. (FT.com has claimed an average of 5.7m unique visitors a month in 2007, a jump of 30% from the previous year).
> story in Press Gazette{/content}

classifieds — Craigslist’s traffic still growing

The overall traffic of the free classifieds website is still growing at full throttle : +93% year-to-year, for the first week of March, according to Hitwise. Measured in the classifieds category, the growth is even better.
> details on Hitwise

monopoly — Google to get EU approval for DoubleClick acquistion

Good week ahead for Google : according to Bloomberg, it will get the approval from European regulators for the planned $3.1bn acquisition of the main ad serving company DoubleClick. Ruling could come as early as March 11. This green light was critical for the takeover. Google was always clear: if the deal is blocked by EU, it will be dropped. This gets Google to an absolute dominant position in the ad display business. > story in Bloomberg

Yahoo/microsoft  — Waging the war from the inside

Microsoft is contemplating the idea of reshaping Yahoo’s board from the inside through a proxy fight, rather than launching an all-out war. According to Business Week, a proxy action would cost Microsoft $20m to $30m. In contrast, each dollar-per-share increase in Microsoft’s bid would add $1.4 billion to the takeover tab.
> story in BW

Microcredit — In New York, the sub-sub prime lender

{What sort of sign is that ? As America is on the verge of a recession thanks to a bitter credit-crunch, the global role-model of microcredit, Muhammad Yunus has launched in January Grameen America. Grameen lends money to the poorest tier of the American population, those with no credit, and no collateral. And thanks to the peculiar way in which Yunus handles credit, these borrowers are not the last ones to repay the loan. Last week, the Wall Street Journal devoted an entire page to a Muhammad Yunus interview.
> story here

User-generated-content — The tyranny of the minority

The online magazine Slate (build in 1996 on old but reliable principles of journalism), is bashing up the illusion of a Web 2.0 “democracy”. In users generated sites like Digg or Wikipedia, a tiny fraction of users are actually creating most of the edits.
> story in Slate{/content}

French press — Sarkozy boosts magazines sales

In 2007, French magazines published 252 cover stories about Nicolas Sarkozy, as candidate or new president, on both the political as well as the people angles. A real boost for the industry: sales increased 6.77% last year. The biggest gain (+34%) was for Marianne, the most “anti-Sarko” newsmagazine.
> story in Le Monde

Journalism — 10 trends that transformed the job

From “the rise of the amateur”, to measurability of websites, or the use of databases in reporting, the editor of the Online Journalism Blog (OBJ) Paul Bradshaw outlined ten trends that changed news gathering.
> story on the OBJ

Newsroom — The World Editors Forum launches a global barometer

How do editors feels those days ? Together with Reuters and Zogby International, the WEF began collecting data for the second annual Newsroom Barometer, a global survey of chief editors about their attitudes and strategies in the multimedia age.
> details on the World Association of Newspapers
> More infos about the barometer at this email
> And on the Editors Weblog, read the updated series of analysis about the future of journalism.
Internet programming — Did Michael Eisner found the right algorithm?

When he left the chairmanship of Disney in 2005, nobody was ready to bet a red cent on Michael Eisner’s new whim : Internet content. Now, he’s currently producing his second Web show. And it works.
> story in The New York Times

Intercept — Skype : too hard do break

Skype, the free phone service, is driving crazy cybercops all over the world. One, there is the volume of data its 275m users are generating ; two, the digital packets it uses are encrypted ; three, the network is used in 28 countries on a P2P architecture (no servers farms). All combined, it makes the most privacy-friendly network ever built. No wonder why the FBI, the British MI5 and the German secret services are asking Skype to figure out some back door to allow legal intercepts. So far, the network is not complying.
> story in The Economist

Steve Jobs, The Rule Breaker

Oh my god! Steve Jobs breaks rules…

Fortune magazine cannot see the difference between artists and bean counters.

Steve Jobs is on Fortune’s cover again: Apple has become the most admired company in America. Is this another PR job of “oral gratification”? If it is, it comes with bite marks or, in politically correct terms, “balance”. As a counter to the effusive praise, we find a piece where Peter Elkind outlines in great detail what he calls The Trouble With Steve Jobs. To their (author and magazine) credit, the piece is well researched, it provides a good overview of Steve’s orgins and career. The writer ostensibly aims high: “It may be instructive, then, to consider what drives the Steve Jobs adventure.” Unfortunately, instead of insights we get is a compilation of Jobs’ known or alleged infractions, couched in a tone by turns righteous and salacious. Perhaps the writer will understand if we turn the ad hominem argument around and look at his publicly documented appetites: a book about the Enron scandal, another about a murderous pediatric nurse in Texas, and magazine articles covering Wall Street malfeasance. Is Steve Jobs to be nailed by this kind of hammer? Yes, Steve looks like he’s running a business, and the numbers are terrific. But no, he’s a creator, an artist, not a business manager. Yves Saint Laurent made tons of money but couldn’t be accused of being a businessman. And the couturier’s behavior… Steve can’t even begin to approach Yves’ well-documented collection of deportments. (Alicia Drake’s book on Saint Laurent and Lagerfeld is a terrific and instructive read.)
Contemplate for a moment Steve’s unequaled string of creations: the Apple ][, the Macintosh, Pixar (think Ratatouille), reviving the Mac and Apple, iTunes and the iPod, Apple stores and the iPhone. How can we expect such creator to be normal, to follow rules? Musicians, painters, couturiers, designers, where are the normal ones? Creativity is breaking rules, it doesn’t belong to the realm of reason.
Contemplate again: For shareholders, Apple’s stock went up about 20 times in a little more than 10 years. Customers flood Apple stores driving up profits and market share. Employees feel part of a successful company and, through options, partake in the shareholders’ good fortune. On the topic of employees, we hear the tales: Steve Jobs is impossible, he makes people cry, the stress there is unbearable. And the turnover? Negligible. Insert you favorite winning team cliché here.

Apple is a 30 years-old company. How do you keep it fresh? (compare with Microsoft, only 2 years older.) You need the desire, the fire of an unreasonable, un-ruly creator. Mr. Elkind is confused, he forgot to Think Different — the Jobs 2.0 slogan. Artists aren’t bean counters. Yves Saint Laurent isn’t Michael Dell.
-JLG

> Further reading: Steve has had brushes with failure and death as movingly recounted in his 2005 Stanford Commencement Speech (text here, video here).

Magazines — The Economist’s contrarians approach to readers

On the US market, The Economist is quietly eyeing the one million mark in copy sales. it did it by targeting smart people, says MarketWatch media columnist Jon Friedman. > read of MarketWatch
> If you want a good insight on the Economist, watch this 2007 video interview of John Micklethwait made available by Stanford University’s Hoover Institution. Here (it’s a 45′ segment).
> And I you want more, read his profile in the Independent

Finance — Behind the subprime crisis : an equation that went wrong

The subprime crisis and the subsequent cascading effect to other credit instruments could have one single origin: the total failure of the portfolio insurance system and the underlying mathematical model that powered it, The Black-Scholes equation. To make it short (so to speak), the model applied to a portfolio of any kind of securities, was supposed to limit the effect of a market drop through the use of options. Except that, when the real crash arises, the model no longer works and it added fuel to the panic it was supposed to prevent. In this excellent piece of explanatory journalism, Michael Lewis (well know author of The New New-thing or Poker’s Liar), details the black-hole equation. The short version: the Black-Scholes formula relies wrongly on the past volatility to predict the future. It only works when things are stable…
> story in Porfolio

The three torpedoes against newspapers

Newspapers are dead — they just don’t know it. Says who? A Zogby poll released last week. 67% find traditional journalism “out of touch” and the Internet is the source of news for nearly half of Americans. Does this mean newspapers are dead? No. TV appears, we predict the death of movies, statist countries prevent TV channels from broadcasting movies on Sundays for fear of empty movie theaters. We know what happened. But this doesn’t mean newspapers will survive the Internet the way movie theaters successfully survive TV. The analogy fails for the following three reasons:

- The user experience difference
- The cost of the delivery medium
- Credibility, Out Of Touch
First, consider a difference of differences. Going (out) to the movies is, we know now, much different from watching a DVD (another threatened medium) from the living room couch (at home). Reading the NYT in paper form vs. on-line is much less different. And there is the annoying (to the incumbents) emergence of bloggers. The messy, shouting, unprofessional world of blogs. Ah, how come readers are so wrong? See the credibility problem below.
Second, the media cost. The law of physics say the market price of content inexorably converges towards the cost of the delivery medium. See music, see desktop software vs. on-line apps such as Google Docs, Microsoft Live or Salesforce.com. Newspapers “overshot” the target: the market price is already below the cost of the printed material thrown on your doorsteps. Advertisers make up the difference. Or they used to. Google now sucks the ad money out of the newspapers coffers. Google offers ways to start with smaller budgets (one of our companies started with $8 per day), better targeting (ads more likely to make sense to the reader), better analytics (what happens to the money I spend) and, of course, the medium du jour, the Internet. (Yes, Google makes noise about selling radio and paper advertising, it’s a sideshow.)
Last torpedo, credibility. Newspaper pros rightly criticize the blogosphere for being messy, noisy, dubious sources, echo chambers, bad writing, no standards. Millions of blogs with two readers each, the author and his mother. Unprofessional say the pros. But we know the establishment’s problem with parvenus: they have arrived. And here, the establishment is making it easy for the parvenus by selling out, by compromising its integrity. We’ll recall how Judith Miller at the NYT sold out to the Bush administration in preparing public opinion to the Iraq invasion. We had the Jayson Blair scandal forcing both the executive and the managing editor out. Did this electrify the paper into raising its standards instead of its nose? Two weeks ago, the NYT got a strong rebuke from its own ombudsman, the Public Editor. The cardinal sin was a whoring attack piece on McCain, with the badly sourced sex talk obscuring a more interesting discussion of money, legislation and lobbies. Just last week, the Technology section sported the kind of lazy journalism that makes the Valley insiders cringe. In essence, the piece explained how Nokia and other smartphone makers were going to listen to customers. Why start now? Do customers lead to real innovation or merely to better/faster/cheaper? None of these questions were asked, leading the reader to suspect what is known as a PR blowjob, an exchange of favors between a PR firm, its clients and the newspaper. Another beautiful example can be found in the Wall Street Journal with a hagiographic report of a Microsoft prince visiting the mujiks in outlying provinces of the empire.
Enough. The list could go on and on.

Newspapers will be around for a long time. The small number of survivors will be the ones that really straddle paper and the Net, some already do, albeit reluctantly, and replace their hauteur with actually higher quality standards. The cream always rises to the top, it’s just that the old one got stale. –JLG

Al Pacino: “Are you a newsman or a businessman?”

Surfing the web late at night, I dug up this great excerpt rom the movie The Insider : Al Pacino, playing the role of 60 Minutes producer Lowell Bergman in the Michael Mann’s film The Insider. If you are amenable to the journalistic mystique, watch these four minutes of a well-cut tirade. And if you have more time, read the fantastic 1993 piece in Vanity Fair about the tobacco scandal of Brown & Williamson. It still remains a a journalitic landmark.

Cash isn’t Cash Anymore

In our Valley, the so-called subprime mortgage crisis has been more a rumble in the distance than the wolves at the door. We don’t like the noise but local real-estate prices aren’t collapsing and, in any event, we’re in the high-tech business, you see. Entrepreneurs come to us for help in building the next Facebook, Google or Oracle (forgetting Larry Ellison, Oracle’s founder didn’t want VC money…). We don’t speculate in esoteric financial instruments, we don’t leverage, we don’t play derivative games. We do start-ups, a man and a dog growing into a company on the NASDAQ or an acquisition by Google.

2007 turned into a great Valley VC vintage: we invested $10.1bn last year, the highest in 6 years. Better said, the highest since the Bad Bubble days. (See the excellent PWC Money Tree. ) Inevitably, the Cassandras in our midst had to predict another fall. Look at these valuations: Facebook at more than $15bn, VMware’s market cap of more than $40bn, Apple and Google above $200 and $700 per share respectively, market caps approaching $200bn, more than 15 times those of Ford and General Motors (about $13bn each), more than Cisco’s ($150bn) and approaching Microsoft’s own $260bn. This was last November. Today, Apple, Google, VMware and other high fliers have shed about 40% of their value.

Is this The End — again? In a word, No. In two, Perhaps Worse.
No. We see none of the Internet Bubble follies. No smoke and mirror IPOs. No Enron, Qwest or MCI. No Henry Blodgets touting a stock outside and calling it a POS (Piece Of S–t) inside their Wall Street firms. And, above all, no Day Traders, no “widows and orphans”, no ordinary people yielding to the get rich quick temptation, to betting the tree would grow to the sky. For perspective, many Internet Bubble stock lost 90% of their value. Even Cisco, not exactly a vaporware company, fell from $90/sh to $8/sh in the space of 6 months. This is not what’s happening here — we think.

But, immune as we thought we were, the subprime crisis could be reaching us in ways we didn’t predict. As with the Internet Bubble, we’re dealing with normal humans falling for the unlimited growth mirage. But the numbers are much larger. Instead of trading high-tech high-concept stocks, tens of billions of dollars lost, the bets were made on the value of homes, trillions. Current estimates put the loans at risk above one trillion dollars with losses to exceed $500bn this year alone. This, you’ll say, impacts consumer spending, spending based on borrowing against one’s home value, the number that was supposed to climb forever. But how does it impact VC investments? Our funds have money to invest and, in contrast to previous years, we look more attractive than the Private Equity sector. We’re not leveraged (we don’t borrow money we can’t repay), we play a transparent game. Earlier this month, business writers started reporting concerns about the real value of cash. The real value of cash ? Today’s financial system works on a network of interlocking bets, sorry, contracts. See how a trader at Société Générale could buy contracts “worth” (E50bn) many times the total market value of his employer. Some of these bets are “safe”, tax-free municipal bonds come to mind. They are deemed “risk-free” because they are insured against the issuing municipality going bankrupt — it happens. But the data used for evaluating the risk, for calculating the insurance premium are obsolete. The sub-prime crisis has loaded the debt insurers to the breaking point and beyond.

Start-up companies with cash reserves need to park it somewhere safer than under a mattress. The rule is to invest the cash in “ultra-safe” instruments — muni bonds and other less well-known securities. You see where we’re going. We discover no one wants to convert these back into cash because the insurer behind the bond may or may not be solvent. I’ve seen e-mail exchanges where the bank that sold these so-called securities as a way to invest the “idle” cash reserve of a start-up now declares the cash no longer cash. And, of course, takes no responsibility for the advice, or the commission. Read the fine print. I’ll let you imagine how such e-mail propagate in our Valley. The sub-prime crisis finally managed to hit us where it hurts most — cash. — JLG

Infrastructure — The thick computer cloud

For each watt consumed in data processing (a search on the net for instance), another half watt is required for cooling the microprocessors. That explains Google’s race for cheap electricity. In 2006, American data centers used more power than televisions sets. Energy supply is so critical for the data processing industry that Microsoft will build its next unit in Siberia.
> story about Google in Harper’s
> and about Microsoft’s Siberia project, in Kommersant