broadstuff

...it drops my link count from c 200 to c 140, despite a whole bunch of new links from the Web 2.0 Expo presentation. Ah well.....leave your blog to go abroad for a few days at your peril

Presented a talk today on the "Limits to FreeConomics" at the O'Reilly Web Expo in Berlin (the slides are on slideshare as below):



Three thoughts:

Firstly, what a difference a month makes - when i wrote the initial posts on the "Limits to FreeConomics" several months ago (which was in itself a summation of posts we've been writing for a year or so), the view that FreeConomics had limits - and in fact probably was closely linked to Bubblenomics - was near - heresy in the Web 2.0 community. However, yesterday at the plenary here, Tim O'Reilly here pretty much said the same thing (see here)

Secondly, it was great to get real life feedback (from European Broadsight readers at that), so here are some responses to the questions:

(i) Is this the Death of Advertising - No, my point was more that there is not enough online advertising for every Web 2.0 startup, and the likely "best future" is to work with customers to find out what they really, really want - in which case advertising will be more like information.

(ii) I only mentioned the "Offset Economics" of using the online presence to aid making money elsewhere - like we do out of consulting - in passing, as I felt it wasn't a major game (yet?) in the new media space (not to say it isn't being used by Google et al)

(iii) It was quite nice to see the backchannel was by and large complementary - not sure what it would have looked like if I'd done this a month ago

If anyone else ha questions from the session, or from reading the slides, feel free to post below on the comments line.

Thirdly, its been interesting trying to tune into the Post Crunch Zeitgeist in Europe as opposed to in the UK - my take so far, 1/4 of the way in is that even though there may be implosion in the centre, models with working services that are executed in different (non- English) languages are still probably quite viable.

Update - I see Dennis Howlett reckons this conference is just last year repeated, same stuff, people etc etc. One addendum - I wasn't there last year, and I can pretty much guarantee no-one was talking about the limits to the economic assumption sunderpinning a lot of the 2.0 startups then either! (Dennis has since replied in the comments, I agree with his point re eyeball counts being discredited)

Update II - I had various other comments from people during Web 2.0 Expo, some perceptive ones here:

- Nancy Williams and Adam Tinworth on the difference between what I was saying vs Tim O'Reilly's round table (and previous evening's presentation) to all the invited blogger corps - nancy thinks Tim essentially argued the FreeConomics was not possible post-Crunch, whereas my argument is that it is not sustainable long term in any situation. (See Adam Tinworth's summary of that session here)

- A number of people noting with amusement during the TechCrunch pitches that everyone now has a Freemium sort of slide tacked on the end of the presentation - the shape of things to come?

All in all had a great time, met lots of interesting people (including The Real Tim O'Reilly), and my thanks to the organisers for a fascinating conference in an intriguing location (AlexanderPlatz being the hub of old East Berlin)

Nice piece in SAI on the probability that Online Display Ad revenue will drop in the next 2 years - especially this chart showing 2002/3.



Not good news for any Ad supported business plans out there.....

The SAI article deals only with Display Ads, I don't know if the assumption is that Search Ads will continue to grow. I suspect that they wll also suffer, as the drop in revenue is driven by people less willing to pay for advertising.

I see James Surowiecki, author of the Web 2.0 staple "The Wisdom of Crowds" is again starting financial and economic blogging at the New Yorker. As he notes:

To wit: My first Financial Page column for The New Yorker appeared in March of 2000, which just happened to be the month that the Nasdaq hit its all-time high and then started to plunge downward. In other words, the start of my column was an almost perfect contrarian indicator of the market’s performance. If the same is true this time around, then the start of this blog would be an excellent sign that we’re nearing a market bottom, and that we’re getting ready to bounce.

We live in hope.....

But even more, I look forward to his thoughts on the similarities between the Wisdom of Crowds, and that Financial Bubble classic Extraordinary Popular Delusions and the Madness of Crowds

Fred Wilson feels moved to apologise for a comment he made re Twitter's business model - or rather its lack of a shiny new one now that Free is no longer as fashionable (aka less people are willing to write the next funding cheque). He said:

“It’s like the stupidest question in the world: How’s Twitter going to make money?," said Union Square Ventures’ Fred Wilson, another investor. "It’s like 'How was Google going to make money?'

Fred feels this is wrong, and in a sensible, hard ars*d business way it is.

But there is another side to the Twitter Question - how does a service so unreliable, so derided and scoffed at, still continue to grow strongly and delight its users? Like Google, it has a certain something going for it which anybody looking at it can see is extra-ordinary. There is clearly something about its user experience which works. And that means it is potentially very valuable.

As to a business model - well, I don't think its just a social network, I see it also as more of a "2.0" style Unified Comms system - think email with pictures - and its in that intersection where - imho - its eventual business model will lie. But I don't think it has all the facilities that you need in a "New Telco", so to my mind that implies its not a standalone business, unless it can find revenue by being integrated into multiple service stacks.

I've noted before that mobile players could do worse than use it as a traffic driver, selling it into their service bundle - imho its ideal for mobile Socnetting - and UC for that matter, its a built-for-m2m-service too imho.

However, endgame must be to find a large player who would get strategic benefit from owning Twitter (eg that mobile traffic) - there has to be a sale of some sort. Telcos, Telco wannabees and media Co's with global aspirations come to mind.

Just finished reading it - Good News - nothing really that the London Measurement Campers don't know already. Bad news - we still all don't know how the metrics really work, its just we are in very good company - this was a survey of 340 European companies.

Some nuggets - a useful chart on cross channel selling media between online and offline media by category - confirms what many of us suspected re which channels are most amenable:



Also, see what I've put in italics:

The rapid growth of online advertising hides a serious challenge: the digital world has developed faster than the tools needed to measure it. This problem has made it difficult for marketers to fully exploit the Web’s promise as the most targetable and measurable medium in the history of marketing. Can digital advertising live up to its potential?

It’s going to take some time. A June 2008 McKinsey digital-advertising survey of 340 senior marketing executives1 around the world shows the breadth of the gap between what’s needed and what’s available. Hobbled by nascent technologies, inconsistent metrics, and a reliance on outdated media models, marketers are failing to tap the digital world’s full power. Unless this problem is addressed, the inability to make accurate measurements of digital advertising’s effectiveness across channels and consumer touch points will continue to promote the misallocation of media budgets and to impede the industry’s growth.

And for you Measurementcampers reading, some other confirmation of stuff we've discussed:

As for allocating ad budgets, leading marketers are now using metrics that permit comparisons between offline and digital spending. One marketer—a home-furnishings rent-to-own chain—used a method called RCQ (for reach, cost, and quality) to optimize its allocation of spending among ad vehicles. This metric, combining rigorous analytics with systematically applied judgment, measures the number of people each ad vehicle reaches and the cost of reaching them by vehicle. It also includes a quality factor based on changes in engagement, attitudes, and behavior. The RCQ analysis showed that the chain spent too much on its workhorse vehicles, such as direct mail, and too little on television infomercials (which convey more information) and online ads (which can be targeted more precisely).

But...

Although a majority of companies still have a long way to go, some marketers have made rigorous measurement a priority. As one participant stated in a recent McKinsey online discussion among marketers using sophisticated analytics: “If we can’t measure it, essentially, we don’t do it.”

The explanation for the lag between the attention online and the spend online is clear, this is a big survey group - and with the decline in the overall Ad spend this could play to the Online world's advantage - we just have to mind our RCQ's......

...because we don't use it

It caused consternation though...so here's a lesson for free - this is not worth it:.

In August, Gmail had three significant outages that affected not only individual consumers of the free Webmail service but also paying Google Apps Premier customers. As a result, Google decided to extend a credit to all Apps Premier customers and said it would do better at notifying users of problems.

Because for anything material to you, the refund you get from your SP is usually a fraction of the value you have lost.

Anybody who puts any form of business critical application on a cloud-only basis has their head in the clouds. Email and Office services are such applications. We use Thunderbird so all mails are stored to desktop as well as a webmail servers (plus backup), and two different mail servers, plus a landline and mobile broadband line. We have Open Office on the machines.

That's what you do with any critical services. You ensure redundancy at all bottlenecks. And we still lose connectivity at times.

If you use only Gmail via web (or similar) , with no on-client backup, in any form of service important environment then sorry you are not a Geek, you are an idio....person who needs to stop drinking the Kool Aid.

By the way, it is for these reasons that we believe the next few evolutions of The Cloud will actually be hybrid services. Email s one thing, but imagine losing your Order Book for 30 hours....

Paul Graham, a person whose posts (and book) I read with great interest, has a post today on timing of startups:

.... a recession may not be such a bad time to start a startup. I'm not claiming it's a particularly good time either. The truth is more boring: the state of the economy doesn't matter much either way.

If we've learned one thing from funding so many startups, it's that they succeed or fail based on the qualities of the founders. The economy has some effect, certainly, but as a predictor of success it's rounding error compared to the founders.

Thats interesting - in the old "Tech, Market, Team" triumvirate Paul is putting team over anything else. I'm not so sure - in two decades of consulting and running bits of businesses, I have developed a slightly different hypothesis - that the best people in crap (declining, hopeless, etc etc) businesses will do worse than than fairly mediocre people in great (high growth, good margin) businesses. Also, I have seen quite a few fortunes made on "right place, right time" luc...I mean talent & skill. Time and Tide wait for no man, however gifted.

Where I would agree with Paul is that:

Another advantage of bad times is that there's less competition. Technology trains leave the station at regular intervals. If everyone else is cowering in a corner, you may have a whole car to yourself.

Don Dodge, another person I respect a lot has also replied to this thread:

Raising money is a little harder, but not much. Good teams with good ideas can always get VC/Angel funding. In fact, VCs are sitting on tons of cash right now...and they want to invest it in hot new startups. Many VCs are reluctant to dump more money into an existing startup that is struggling, but will invest in a new startup idea. The promise is always more appealing than the reality.

Everything else is cheap and readily available too. Office space is always cheaper and more available in a recession. Existing companies will sub-lease space really cheap to offset some costs. Computers, software, networks, desks, equipment...everything is cheaper.

Expectations are lower during bad times so it is a good time to be in development mode, building a product, getting an audience, and starting a tiny revenue stream.

Customers are willing to try new things to save money in bad times. When things are going great they don't want to take risks on a tiny startup. If you can save them money in bad times...they are happy to deal with a startup.

This all rings true, with the possible exception of the VC/Angel bit - Paul's point is that investors follow the herd mentality:

....just as investors in 1999 were tripping over one another trying to buy into lousy startups, investors in 2009 will presumably be reluctant to invest even in good ones.

The other thought I had was "where". Last week at FOWA there was a lot of talk re starting up in London rather than Silicon Valley, and I wonder if this slowdown will push things toward SV or away. I fear it will be towards, as my observation is SV only tends to "export" its model when it hits capacity limits at the top of booms.

That said, the UK - London especially - has in my view a key competitive advantage, which is a deep understanding of video media, as well as at least a comparative capability in mobile. These are growth areas in the Internet as well, its the New Hollywood. If I were advising a UK startup wannabee, it would be to set up in these areas.

I was listening to an article on BBC Radio 4 about people who have bought theatre and music tickets from eBay, only to find they were false. The people who were stung in the article were paying 4x the cover price.

But what really interested me was that they noted that about 40% of the UK ticket market goes through touts (people who buy tickets at face value, typically from organisations that get allocated tickets and then on-sell them). This creates the calculation below, where there is clearly far more money in touting than in actually being a musician.



Shown here is the economics of a show where the market price is 3x higher than the cover price. The musician will make a % of the overall 100% of tickets - say 40%.

The tout industry will make, at 3x cover, an extra gross profit of 80% of the original 100% value from all tickets at cover price, ie twice what the musician is making. So for example, if you sell 500 tickets at £20 each (£10k gross income) and make 40% as the artist (£4k), the touts are likely to make £8k profit ( £12k sales less £4k ticket costs )

Two obvious conclusions:

(i) The tickets are underpriced in the market, the musician and promoter clearly should be extracting more revenue and selling the tickets for more

(ii) The Musician is probably better off being a tout and making music in their free time

What interests me about touting is its been around in London for the 20 years odd I've lived here, and probably far longer - you would have assumed, given the size of it, that the industry would try to stop it to get their hands on the surplus being given away.

Reading about the layoffs on Techmeme this morning, two things struck me that are fairly key to any startup business model

Firstly, TechCrunch reporting on SocNet Hi5 laying off 15% of its staff, despite a glowing writeup on the blog re Fortune mag - that sort of thing doesn't help the cred of corporate blogging at alll.

Secondly, Ad agency Adbrite laying off 40% of its staff - but what hit me here was this:

- Adbrite has revenues of c $32m
- They serve c 1.3 billion Ad impressions a day

Which allows a rapid calculation that their mean revenue per 1,000 Ads served is c 6.7c. Assuming that they take the full revenue before passing it on, that implies the mean CPM across all of AdBrite's customers is of the order of 7c. That's probably a good indication of the mean value any startup should assume.

So, assume you want to build that $100m business - at 7c CPM, say 30 impressions per visitor per month (c 1 visit/page read per day) and 2 Ads per page means that you need c 20 million unique users. If you can get them to visit say 3x a day, and read more pages (say 2 per visit) then it brings down the need to a mere 3.3 million uniques

Update - I see while I was writing this that Alex van Elsas saw the same thing:

A staggering 475Bln times a year people are exposed to advertisement so that Adbrite can earn 32Mln a year. A perfect example where the transaction costs to display advertisement have dropped to zero, but the accompanying value that is being created too.

That got me thinking, as the transaction costs are not zero - I'm not sure what they are for AdBrite, but assume bandwidth costs c $ 0.50 per Gb and each served Ad is 10,000 kb (c 1,000 kB) that implies c 5c per 1000 Ads served - and thats just the fully variable bandwidth costs, before staff etc.