The big news this week is Facebook’s announcement that it would take the company public, in one of the largest offering in history, raising an expected US$5 billion in the process. As this is the largest tech IPO since Google, it is time to run the number and assess whether similarities or difference exist when it comes to base numbers. What appears there seems to justify the $75–100 billion valuation some see the company getting at IPO while providing a few points of concerns about the future growth of the company.

The topline numbers

The first numbers everyone is looking at are how much the  company is raising, how much it’s making and what its profitability look like. If we compare the 12 months preceding the offering for Google and Facebook, the picture looks like this (all figures are in thousands of dollars, unless otherwise stated):

Looking at those numbers, the Facebook IPO seems relatively cheap compared to the amount of money Google was looking to rise when it went public. However, since we don’t know how many shares Facebook is looking to sell for those US$5 billion, it is impossible to assess how much the company should be priced at.

Using Google’s market cap at its strike price and at the close of its first day, we could look at the multipliers for revenue and net income as possible hints as to how much Facebook could be valued at on its first day:

So if revenue and income were to be considered as the only indicators for what value to give Facebook, the valuation range of US$75–100 billion for the company doesn’t seem totally incredible. However, one would have to consider whether Facebook could grow its revenue at the same rate as Google did. While it starts from a substantially higher number, it also means that the company is probably in a more mature stage and may not be able to grow its revenue at the same speed as it has in the past.

Revenue

While Facebook’s revenues are impressive, we should see how they break down in order to get a better sense as to whether a comparison to Google makes sense. Digging into the S-1, we find interesting numbers such as the percentage of revenue that comes from advertising, the percentage change from the prior year’s ad revenue (and from the year before that, giving us a sense of what growth looks like) and highlights as to the percentage of revenue coming from significant external parties. I’ve summarize this data in the table below (dollar values are in thousands):

While Facebook’s ad revenue are substantially larger than Google’s were at IPO time, its reliance on advertising is 10%, showing that the company may be more successful as diversifying its revenue base. This appears to be a good thing as the last 2 years of ad revenue growth seem to have been slower than what Google was experiencing when it went public. Another sign that we may be dealing with a more mature growth curve when it comes to the company’s ad revenue is the fact that it seems to have already been fairly successful in ensuring that its revenue base was no longer just a US one, with only 56% of its ad revenue coming from the US, while Google was deriving 74% of its advertising revenue from the US when it went public.

Much has been made about the mention in Facebook’s offering that it derived 12% of its revenue from deals with Zynga, the company that has successfully provided a number of games for the Facebook platform. However, one must realize that such reliance on an external party is not so unusual and that Google was warning that 21% of its ad revenue were generated by managing the ad inventory of external partners.

So all and all, the revenue picture for Facebook looks pretty strong but advertising revenue may be decelerating, with question as to whether the other sources of revenue are growing at high enough a speed to counter that deceleration.

Costs

On the other side of the financial register, one has to look at whether Facebook is as efficient on managing costs as Google was when it went public. Fortunately, here again, the S-1 filings provide us with usable data (all dollar figures in thousands):

The first thing that jumps out when looking at those numbers is that Facebook seems to pay substantially more for its revenue than Google does. In fact, if you look at the multipliers on cost of revenue (7.06 times) and actual revenue (3.86 times), it seems that it takes almost twice as much for Facebook to make a dollar as it did for Google when it went public. Some of this has to do with R&D costs, which are substantially higher as a function of revenue than the ones Google had at IPO time. Sales and market and overall costs and expenses seem to be lower, as a function of revenue, than Google’s were at the time of its offering. This may be a sign of an organization with more mature cost control metrics.

Keeping an eye on the cost of revenue may be an important factor in assessing where Facebook is heading revenue wise. If that number keeps rising, the company’s margin may erode, making it a less attractive business. In its offering document, the company is reporting a US$.43 net income per diluted share: this is slightly better but mostly comparable to the US$.41 per share Google had reported in its offering documents.

How much revenue per employee?

Both filings provide information as to the number of employees each company had. When it filed to go public, Google had 1907 employees; by comparison, Facebook had 3200 as of its filing. This is a useful number as it allows us to compute revenue per employee, a common measure of how effective a company is. When it filed, Google was making US$504,391 per employee; by comparison, Facebook is making US$1,159,688 per employee.

This is pretty significant as Facebook appears to be making twice as much revenue per employee as Google does. But how profitable are each employee?

Using the same approach, we can find out that Google made US$55,400 in net income per employee when it filed while Facebook makes US$312,500 in net income per employee as of this filing. This is a pretty impressive number but it is in league with what Google makes today (US$336,297 as of a year ago) and ahead of the rest of the computer industry, with the exception of Apple and Google.

If we were to look at Facebook by this measure, it most definitely earns a spot in the US$100 billion market-cap club.

Methodology

For the purpose of getting this data, I pulled all the numbers from the respective S-1 documents for Facebook and Google. Because the numbers in Google’s S-1 were in thousands and the numbers in Facebook’s S-1 were in millions, I have normalized all numbers to be in  thousands. All numbers were pulled directly from the respective S-1 filings or computed from the numbers I’ve exposed.

Conclusion

I’ve looked at a number of ways to quantify how big Facebook is from a financial standpoint and compare it to what was the last IPO of this scale in the tech world. The Google IPO was the launch of a company that had been dominating a large part of the discussion in tech circles over the previous 5 years. The same is true of Facebook, which has managed to grow from a project in a Harvard dorm room into a company that is serving around 800 million people. From a metrics standpoints, this company also appears to have a very strong business that compares favorably with other tech giants and the numbers bandied about in terms of valuation do not seem to be particularly outrageous when put in the greater context of the rest of the industry.

Of course, this does not mean that it is a business that is guaranteed success in the future. Some questions still remain around the cost of its revenue and the company’s ability to continue on the same growth curve as it has in recent years.

If you were to ask me if the Facebook IPO represents a new level of froth in our industry, I would be tempted to say that, based on the core numbers, that does not appear to be the case.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Facebook IPO vs. Google IPO. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

Traditional Media Model

In the United States, it appears media companies are following three different models: advertising supported (broadcast TV, for example), directly paid (first-run movies) or funded by alternate means (eg. merchandising concepts).

The established models are currently feeling pressures created by the rise of digital media. Advertising supported models, for example, have traditionally relied on high levels of inefficiency, allowing for high priced productions to be paid for by advertising. With the rise of online advertising, some of those inefficiencies were highlighted and advertisers have started to put some pressures on the advertising prices around traditional media.

Meanwhile, directly paid media is starting to suffer as an explosion of cheaply produced content hosted on the likes of youtube is now competing for viewers’ attention. When coupled with the fact that some corporations have tried to compensate from the lower audiences by increasing the per unit price of a seat (whether it is a theater seat, with Broadway first run shows now often getting $100 per ticket or movies, which are edging closer to $20 per seat), the level of attendance at paid media events seems to be decreasing.

Merchandising still seems to succeed pretty well, with media content now being created around toys (eg. Transformers) or web sites (eg. the upcoming Onion movie).

The New Media World

Meanwhile, around the tech industry, there seems to be a growing consensus that media models will focus around product, people, or platforms.

Some people feel that customers may continue to flock to established brand, because of a certain recognition of qualities associated with that brand. They view the product as key to the potential future of media and look to the establishment of new brands as the key to success in the long run.

Others look to the future of media as being predicated on adopting a model that includes a wider group of people. Whether it is blogs, twitter, or other consumer-generated media, this camp looks to the lower production and distribution costs associated with such model as the saviors of the media industry.

Another group looks to the platform model, providing tools that enables people to create and distribute media without being involved in any of the editing or selection. People look to the creation of platforms that can work for distributing media across multiple channels and provide an accelerated rate of turn-over in terms of the type of media pieces being distributed. So basically, platforms are a basis for merchandising cross-sell deals.

The Agency Model

With merchandising platforms being the only arena on which traditional and new media seem to agree, there may be a chance that the agency model, where companies are producing content on behalf of brands, are the future of media.

For example, one of the biggest success in online media this summer was the product of an advertising agency: Wieden and Kennedy produced a very successful ad campaign for Old Spice, a deodorant company, that took the online world by storm earlier this summer.

A couple of years ago, Cripin, Porter, Bogusky launched subservient chicken, another ad campaign that was well received online.

In both cases, the agencies have done a great job creating characters around brands. The chicken was supporting a Burger King; the old spice guy is ultimately pushing deodorant.  In each case, they can be considered traditional ads but the addition of characters means that they could build media-like developments around the characters. And I suspect it’s only a question of time before some characters created for ads start showing up in TV shows or movies.

What has gotten me thinking that the model for the future of media may be in following the path set by advertising agencies is that, increasingly, when one asks a new media person about their business model, they focus on how they work with marketers to reach out to audiences.

The internet is equalizing access not only for people but also for brands. As a results, brands are now creating their own form of media goods to cut through the clutter and no longer need to attach themselves to any other form of media. A clever ad can stand on its own as a media good or a clever storyline can receive a sudle influence from a particular product.

In a world where media is increasingly dolled out in more of a bite sized form, ads are competing for airtime with other forms of content. The future of media companies, as a result, is to figure out a way to help those brands break through the noise and, as a result media companies may increasingly find themselves at odds with the advertising agencies they traditionally saw as equal partners.

The question remains as to what will happen to subsidized media and journalism in such a context. Will it continue to exist of will those forms of media completely disappear? Online time will tell.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Agency is the future of Media. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

The many faces of subsidized media

Do you buy the media you consume or is the media you consume subsidized in some way?

For the most part, one could argue that, in the United States, media is subsidized. When mentioning that word, most people will think of government subsidies but, while such subsidies exist in countries like the UK (eg. the BBC) or France (eg. France 24), the subsidies tend to come from more commercial sources.

We will look into that type of subsidies a bit later but let’s first look at one form that people seldom consider as a subsidy: advertising.

In the USA, such subsidies come in the form of advertising, which often represents the largest part of the revenue pie for newspapers, magazines, television, radio, or web media. The cost of a particular item is generally lower than one could find in Europe and consumer behavior treats such media accordingly, as a potentially disposable consumer good to which little value is given. This creates a particularly tricky situation for most media outlet as they are seeing their advertising margin erode, the result of greater efficiencies and return on investment presented by web media.

Genesis of low ad rates

In a way, such wound is self-inflicted. Once upon a time, in the early days of the commercial web (a bit over a decade ago), traditional media looked down on the new media. They treated it as something of little value and many of the larger media outlets decided to toss their online space as a freebie in exchange for richer ad buys in traditional media. Of course, they continued to apply the same ROI metrics to this emergent form of media, forcing many of the online components of larger corporations to figure out way to make their cost structure more efficient while presenting advertisers with a better value than their offline brethens.

I remember finding myself in several meetings, when working either as a full-time employee or consultant to media outlets small and large, in meetings where traditional media salespeople would “toss in online for free.” Eventually, advertisers started demanding online media and continued asking for lower costs on it, creating a prisoner’s dilemma scenario for most media organization as they all knew that the ads could go to their competitors if they didn’t acquiesce to the deal. Online media was now seen as inexpensive and, save for a few publishers who argued based on the merit of delivering a narrow but highly targeted audience, cost remained low while inventory continued to be very high.

Then came Google, which not only showed that online media could stay cheap but could also be offered on a performance basis, leaving advertisers with close to a dollar’s worth of value for every dollar they spend, something that just wasn’t true in the offline space. It was then only natural that the price pressures that had driven online media down be applied to all media.

This is slowly sending media organization into a death spiral as low ad costs force a reduction in costs associated with producing media content, which results in a lowered interest in that content from consumers. Those consumer have eyeballs which the media companies are trying to sell to advertisers and when those go away, it puts even further pressure on media cost. I call this the ad rate death spiral:

Why ad rates keep going down

And that’s the first problem with the current crop of ad-subsidized media: the model is just not sustainable because the cost of production for most media can never go to zero.

So where does that leave most media organization?

Advocacy Media

One option is to go with a different subsidy source. For example, some organizations could get rid of the pretense of impartiality and look to get subsidized to advocate a particular viewpoint or philosophy. In Europe, for example, many publications receive substantial parts of their funding from political parties. They are propaganda tools of those parties used to further the party’s agenda. While they are not fully subsidized by those parties, they are known to present a viewpoint that’s in line with the party’s ideals.

While many would argue that this could not work in the United States, there are substantial precedent to highlight that this, in fact, is an avenue that more media organizations could explore. The federalist papers, for example, were largely embracing a set of ideals from a limited constituency and were largely funded by those who espoused the ideals presented. In fact, one could argue that most newspapers have, at one time or other, been tools of certain political forces. To carry such alliances on their sleeve might actually result in a more diverse and balanced set of stories.

Non-Core Media

A different solution is to look at media as an non-core adjunct to a corporation, there to give the corporation a sheen as a corporate citizen that does good. Where it not for its pre-existing history as media company, one could argue that the Washington Post is now such a corporation, as it derives better margins from the services it offers through its Kaplan test preparation organization than it does from its news and media operation. The issue one could find with such balance is that it works as long as the shareholders are happy with the idea of a non-financially optimal media operation. This situation does not seem like a sustainable model in the long run because it could expose such corporation to the chances of a take-over or change in ownership control through acquisition. No family, no matter how much of the corporation stock they control, is so virtuous that it might not break at a certain price point, as was witnessed with the takeover of Dow Jones.

Paid Media

Another route would be to change the public they serve completely by embracing their consumer as the people they sell to.

The reason I create that distinction is that currently, most media is not looking at their consumers as the customers they are serving. In advertising, the actual customers of media companies are the ad agencies and ad buyers, with the media consumer being the goods sold and the content being there solely as a way to deliver more eyeballs to the advertisers. By moving to consumer-focused media, organizations could radically redefine the relationship they have with the people who consume their content, treating them as customers instead of products.

Of course, the model may not work for everyone as it requires a change in the way the media product is marketed. When shifting to “paid media” where the consumers pays a fair value for the media they consume, the product position has to be one of value to the consumer. Bloomberg can deliver such value to the people who pay thousands of dollars yearly for access to their product because the content is of value to those consumers. NPR tries to position its programming as being a lifestyle choice by its consumers, asking them in pledge drives to join the NPR tribe by paying for some of the programming (but let’s not fool ourselves, NPR is more of a hybrid model as its “supporters” can include large corporations that contribute to show their “social responsibility”).

Consumer Reports is another example of such “paid media” as are smaller publications like Lapham’s Quarterly, for example.

What are the challenges?

The challenge presented by the paid media model is one of how much? How much can one charge and how much can one cover. And this comes back to the question of content value to the consumer. Certain tribes can exist but how does one cover the “important” stories? Is that something that can only be done via advocacy type media? Or is there a different model that mixes parts of subsidies with higher paid models?

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Subsidized vs Directly Purchased Media. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

How it started

When I first started classifying media as entertainment vs. information, I was looking for a basic answer as to how to resolve the contradiction of having organizations like CNN, MSNBC, and FoxNews, classified in the same category as Bloomberg News, the Wall Street Journal, or the Financial Times. Each seemed to appeal to a certain audience and each of the audiences seem to be very distinct and thus interested in very different things.

For example, the sexual behavior of many politicians may serve as great meat for the 24-hour-newscycle of cable TV channels but financial newspapers would pay scant attention to them. On the other hand, in-depth analysis of the decision making process around changes of 5 basis point in an interest rate might garner an audience in the financial world but may only merit a 15 second mention on some cable news channels. That disconnect seemed to only get sharper over the last year, as the world economy teetered on the brink of total financial collapse but most of the TV channels seemed more interested in attacking or praising a particular political point of view.

Why this axis?

Answering a question about where on the entertainment vs. information axis a particular media organization can fall gives us insights into some of their potential business strategy.

The production or discovery of facts or information is generally a more time-consuming and/or costly production than the production of opinion or entertainment. For a simple measure, think of the cost of a reporter doing an investigate piece either in a war theater or about a financial institution; Having thought of that reporter, now think of a different reporter interviewing a TV or movie star who is promoting the latest vehicle he/she is in. Because the motivations are different and the amount of work to feed those motivations is different, the business model needs to be different.

Entertainment

As I mentioned earlier, I consider organizations like Fox News, MSNBC, and CNN to be more deeply ingrained in the entertainment side of the house.

This, by the way, is no accident: Rupert Murdoch is a savvy media man first and a politician second. He was the first in his industry to realize that it would be cheaper to put opinion on the air and focused on delivering such opinions to what was then an under-served customer  niche: people who are of more conservative leanings. This is why Fox News can exist under the same roof as the definitely racier and more left of center fares delivered on the Fox TV network. The network appeals to a different audience but, by serving both, a near-full coverage is achieved in terms of advertising reach.

The recent success of MSNBC in reproducing the FoxNews model but for the more liberal audience seems to validate the model: Keith Olbermann is the Bill O’Reilly of the left.

But one must realize that the value of entertainment as a business model is driven by the idea of maximum return on investment: the production costs are cheap, the consumers are aplenty and while they may not be willing to pay, someone is generally ready to subsidize the lower costs in exchange for access to that audience. For example, book publisher love giving their authors away for free interviews if they can get them because it helps promote their books; movie and TV producers push their stars to give interviews for free too so the movies and TV shows they are in get an audience (a form of virtuous circle of entertainment); and political parties or organizations pushing a particular political agenda are happy to deliver “research” and “experts” that can be used to produce news-like segment.

Because most media organizations in the United States are profit-driven corporations, the appeal of those lower production cost is hard to resist.

The challenge to that segment of the axis is that entertainment is based on the available mind share one can capture. Every time an audience member is moved from one TV channel to another, or from an internet site to another, the place where he/she was loses some value. And, in recent year, the mind share and attention share traditional media used to get has been diminishing because new form of entertainment have arisen. The sheer volume of videos posted on YouTube alone means that, even if 99% of them are awful, 1% will find an audience and drive it away for whatever period of time the end consumer is engaged with that one percent.

So the margins on entertainment media are bound to become a little tighter in the future which will push that end of the media spectrum to move further and further into the sensational and traffic-generating space. This, in turn, could mean more of a focus on formulaic type of content that is known to appeal to a broad segment and hoped to appeal to a wider one.

Information

But information driven media is different. Information tends to be something that is actionable and therefore something that is more valuable. When people speak of information media, they generally focus on the business-focused content category. But why do so?

A lot of information is usable to someone. For example, I am sure that politicians enjoy sentiment-related information (poll numbers, data on how the population feels about an issue); gamblers find use for sports-related information; medical professionals and other scientists keep up with research in their field to come up with more breakthroughs; companies, of course, need industry-specific information to better position themselves.

But professionally created and vetted information is expensive to produce. In the past, such information was produced and vetted by a cadre of professionals with deep knowledge and some level of recognition within the arena they would cover. On the more extreme end, the producers were the subject of the news themselves (for example, most of the scientific journals are written by the scientists who have done the research in the first place).

And the other interesting thing about information is that it can have some stickiness.

But the tricky part is that most information is of no interest to most people. And some information may be of value in terms of public good but not necessarily of actionable value for most people. That, unfortunately, is the case for most of what is presented as “news” in newspapers. Town councils, officials corruption, issues surrounding policy making are things that need to be covered in order to create a proper functioning democracy but have little value outside of having a properly functioning democracy. And few people are willing to pay to keep democracy working.

Enter two new phenomenons: the wisdom of crowds, and the self-correction of personal interest. Let’s assume for a moment that crowds can actually be led one way or another. But, as we all know, for every action, there is an equivalent reaction. So we could extend on the idea that any system is bound to eventually become self-adjusting when all interests start fighting for its own share of whatever is at stake. On most policy issue, there will be two sides, with each side arguing passionately that its position is the correct one.

So one could assume that the self-interest of individual sides could lead to the rise of advocacy media or at least politically-aligned media. In such a model, “information” may be gathered and presented by self-interested parties. The consumer is then left to evaluate the pieces of information aimed at him/her and see if it confirms his/her own biases or is or isn’t more factual. This, by the way, is a model that exists in a lot of democracies around the world (France, where I originally lived, still has newspapers that are clearly aligned with political parties) and I would argue that the penny press was probably more akin to this model than what we know today as newspapers.

This brings another qualifier on the information slide, which would allow us to analyze the level of bias in a piece of information. Some may argue that doing so would be abandoning the concept of objective reporting but I would argue that such concept has been largely a chimera: whenever a reporter chooses one quote over another, or frames a questions in a particular way, he/she imbues the reporting with some form of bias.

What’s the take-away?

Entertainment and Information are important dividers in assessing media property. Understanding that divide can help us better under the potential risks or reward associated with such. Entertainment media is cheap to produce but does not necessarily create real value; Information media (which may have differential level of biases) is not only valuable in both short and potentially longer run but could be dependent on a self-interest effect.

In the next entry, I will examine how the media is paid for and what that may mean for some segments of the industry.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Entertainment vs. Information. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

Media as a Mode of Delivery

In most of the conversations about media, the discussions centers on modes of delivery. People talk about television, radio, newspapers, magazines, or the Internet as media. Under that definition, the way a piece of content is transported appears to define what that piece of content is. It’s an odd approach that seems to put more emphasis on the how than on the what, that really believes that the envelope is more important that the message it carries and this offering seems like a flawed assumption in many ways.

It would seem foolish to consider the telephone a media form so why do we treat the television or paper as components? They are channels and nothing more and the hand-wringing around delivery to those channels seems based on the flawed assumption that the mode of transport is more important than what is transported.

There is an inherent danger in that flawed assumption as previous industries which failed to recognize the business they were in found themselves displaced and ultimately delivering value into the hands of a single player that concentrated its power by offering itself as the primary toll-gate on another form of distribution. The music industry circa 2001, for example, believed that it was in the business of moving plastic goods known as CDs and let Apple take what was written on those plastic goods, the music that is ultimately the value created, and delivered it over the internet. To this day, many in the music industry still believe that CDs are how music ought to be distributed, leading to such high performance act as Danger Mouse’s decision to just release a blank CD-R when the labels wouldn’t let him release the CD otherwise.

Today, newspapers are focused on finding better ways to move paper; magazines are focused on increasing profit margins against physical goods; TV channels are still arguing over number of viewers in a single sitting and radio is partly organized around two competing models: one where people and corporations pay in a coop form to get some form of programming created and distributed and another where advertisers count numbers of earlobes they are reaching. Even on the internet, some people still believe that the passage of masses by a web site has some level of importance.

In each case, the players are focused on the distribution and not the product and yet, the distribution medium is only one end of a relationship that needs too.

In the Middle

Because if you look at the core definition of a medium, it’s something that’s in the middle.

But in the middle of what? Trying to assess this becomes a little more difficult. Obviously, a good is produced and it is consumed. Focusing on that equation may get us closer to establishing the right model for media in the future because it forces us to admit that what we know today as media is not a single thing but a variety of things:

• On one dimension, it could be listed as going from entertaining to informative
• On another, it could go from being considered as purchased or subsidized
• On a third axis, it could be treated as mass generated or professionalized

In three simple dimension, we can break down most of the known media industry.

For example, take newspapers: They strive to be middle of the road between entertaining and informative, with a bias towards the front section of the newspaper being informative and the back section being entertaining; They also range from the completely subsidized approach (free advertising sponsored newspaper) to the heavily subsidized model (most newspapers). And most tend to be more professionalized, with professional editors and reporters building most of the content.

Magazines run the gamut, but largely focus on entertainment (the delivery of information is generally left to a much narrower portion of the market knows as newsletters); they are, for the most part heavily subsidized goods and mostly professionalized.

In the TV space, the news channels tend to be moving further and further into the entertainment arena (I would group opinion as a form of entertainment); They are 90+ percent subsidized as their main goal is to serve the advertisers and only a portion of their revenue is coming directly from consumers through some of the cable system carriage fees.

In radio, NPR is balancing between entertaining and informative; the interesting thing is that it is the closest thing to a purchased good as the group tends to attempt to get its consumers to ante up for their consumption; and it mixes mostly professionalized goods with mass-generated content (call-in shows, for example). Other “news” station tend to focus on the entertainment part of the equation (talk radio is focused on keeping its audience as engaged as possible) and fully subsidized (advertising based) and mostly mass generated (talk show host merely serve as the forum administrator ensure that like minds confirm their own bias or vent to each other).

On the Internet, diverse sites can run from pure forms of entertainment (celebrity or gossip blogs, for example) to heavy information delivery (generally more niche focused publication); they are also all over the place in terms of models, ranging from the fully subsidized model to the fully purchased one; and one could argue that they tend to also run the gamut in terms of mass-generated vs. professional production.

While I have given you a short preview of each of the dimensions, I would like to focus the discussion around particulars so I will delve further into each of the three dimensions in the next few entries.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title The Three Dimensions of Media. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

Media: Advertising

The advertising industry is probably going to be one of the most affected industry this year, hit by the double wammy of a slower economy and a push to digitization.

The economic slowdown will result in a substantial drop in advertising expenditures for traditional media: Newspapers and magazines are already feeling the pinch and I suspect it is not too much longer before television, radio, and display advertising go through the same changes.

Direct media will continue to do OK, however, as it is result oriented and this fully measurable.

Online advertising will continue moving towards performance-type models with CPMs dropping substantially and CPCs and CPAs becoming the de-facto standard.

Social Media will see a sharp reduction in investments unless it can prove that it can perform better than other forms of advertising, as companies will be less interested in experimenting this year. This will put pressure on pricing models relating to social media. One potential way to fight back is to highlight targeting and demonstrate as such targeting benefits ad buyers.

The net-net of all this is that advertising agencies and their holding companies are going to feel pretty squeezed this year, unless they start developing marketplaces than can help their customers purchase bundles in a more efficient and more cost effective fashion. Because ad agencies have generally been slow at reacting to changes in their industry (we’re over 10 years into web-based advertising becoming mainstream and some ad agencies buyers are still questioning its impact), I’m not very hopeful for their short term outlook and positively worried about their long term one.

Media: Print

Print media is about to have one of the worst years of its existence. Newspapers will continue to fail and at least one major newspaper will close by year end (by major, I mean one of the top 100 newspapers in the country).

Most magazines will see substantial drop in their advertising base and many will move to web-based only productions, transforming themselves from print publications into web-based ones. In the process, many of them will have to shed staff as the economic model for web-based publications tends to be much more thinly staffed than that for prinit publications.

Other magazines, like The Economist, The Atlantic, Harper’s, and The New Yorker, will continue to thrive as print continues to be a better place for long form writing than the web. As other publications depart for the web, those long-form, more reader-oriented (and by reader, I mean people who READ instead of scan articles), will continue to thrive, with their advertising base increasing in value.

Media: TV and Movies

The movie industry will, at best, remain flat, and probably see a small decrease in revenue.

TV, on the other hand, is in for a major shake-up. Just as newspapers are starting to feel the pinch of the Internet, IP-based video is going to have a substantial impact this year, eroding audiences as they increasingly choose the place and time for the shows they want to see and, in some cases, may even demand the way in which the media offerings are offered to them.

Just think of the current offerings: today, you can watch a show on television, you can buy it from iTunes or Amazon, you can stream it (or at least stream older episodes) on Netflix as part of you rental plan, or you can watch in in an advertising supported mode on either hulu.com or the station’s own site. On hulu.com, you may have a choice of advertising either watching a two-minute commercial before the show and watch the show uninterrupted or you can watch the show with some limited interuptions as you would on regular TV.

However, today, most of that experience is based on the assumption that you would be using your computer to do so. A new class of devices is starting to appear that are offering access to some of those services directly from your TV: Apple started with their AppleTV device and companies like Roku, LG, Samsung, and others also now have offerings on the market. This will become more common and continue to erase the mark of what TV networks are about. The focus will continue to shift to shows, giving more power to creatives who can deliver the goods to an audience and lowering the usefulness of aggregating middlemen, which is essentially the role TV networks currently play.

In turn, advertisers will want to pay less for TV as they can measure those audiences less than they can those online and see decreasing return on investments for their TV-based advertising expenditures as compared to their digital ones.

So the bottom line is that traditional TV will suffer as more an more of video production is moving to an IP stack.

In the next entry, I will look at general technology related trends that may emerge over the next 12 months.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title 2009 Predictions: Media. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

Strategic Position

Google lives on the web. Most of its application need a web layer in order to operate and, if it were to find itself in a position where the access to their application where to be compromised through the equivalent of a strategic man in the middle type of attack, their business would die off. So, if Microsoft, which currently still controls around 70 percent of the web browser market, were to decided to change their code to impact how Google applications function, Google would be in deep deep trouble.

Because Google realizes that the browser is sort of their achilles heel, they had to make a play into that space. The first thing they did was help the creation of an alternate offerings, by giving large subsidies to Microsoft competitors like Apple and the Mozilla foundation, largely dolled out as revenue for traffic generation through the search box. See, one of the thing not too many consumers are told about is that the search box in Safari or in Firefox are actually paid placements: Every time a user uses that box to perform a search, a little bit of revenue goes back to the browser creator. So that’s great because it allows those alternative browsers to develop and, as long as Google is people’s preferred choice anyways, no one is complaining.

Of course, there are certain issues with the arrangement: a lot of the people who have installed Safari or Firefox don’t like online ads and some developers were happy to provide tools allowing those users to remove ads from web pages. Google wasn’t too thrilled about that but it found the issue mostly OK as long as the arrangement didn’t hurt its advertising cash cow too much.

But over time, this model created a problem. The feature was tested by consumers who, having seen too much of their screen real estate polluted by ever larger ads, liked what they saw. And, as ads became smarter and started to target users individually, it spooked consumers. Being able to block certain ads became a product differentiator and started to cause some problems to Microsoft.

So, with IE8, Microsoft is starting to claim that it will help users and one of the trial baloons it has been floating is that the user may have more control over what ads they can see and possibly may be able to block some ads.

For Google, that’s not too happy a development: the idea of being able to provide free products is based on the fact that Google is really and advertising company with a side business in search. And if the advertising is blocked, then Google’s whole business model falls apart.

So now, Google needs to regain some level of control. For many years, it’s been going after bits and pieces of the Microsoft empire: a little bit of the office suite over here (Google Apps), a little bit of the enterprise space this way (Google Appliances), a little extra screen real estate (Google Widgets), an alternate application distribution network (Google Pack)… but the premise behind most of their offerings was that life was now in the “network cloud” (basically recalling Scott McNealy’s old “The Network is the Computer” concept with 2.0 flavor).

With Chrome, Google is now trying to bypass most of Windows. There’s still a few things that Windows will be allowed to do for now (connecting to the Internet, managing the communication layer) but it seems that this is the farthest Google has gone into addressing Microsoft head on. In the mid-1990s, Marc Andreesen, then at Netscape, said he wanted to relegate Windows to being just a set of basic libraries and, with this offering,  Google is trying very hard to do so though I am sure you’ll never hear them say so.

Will it work? I don’t know. At first glance, I’d say that their challenge will be to get the software installed on a lot of machine. For all their past efforts, it looks like it may take a while. Once they have gotten Google Chrome installed, the next thing will be to move up to a default setting. That will be another challenge.

What I suspect is that the company will soon offer a customizable version to cable and phone companies to ensure that they choose Chrome over Internet Explorer. And one thing I’m pretty sure about is that whatever happens, Google will ensure that ad blocking software will not work on Chrome.

Memory Management: Marketing or Truth?

One of the things that leaves me scratching my head is whether the memory management Google claims as an important piece of its offering is actually based more on marketing messages than reality. Buried in the developer’s menu is an item that supposedly offers a view into the memory and CPU usage of Google’s new browser. Yes, the browser feels fast so it’s clear that there are a number of improvements there but what is that costing in terms of memory. Here’s what the browser reports:

What you’re seeing here is the browser running two plain HTML pages and an instance of a richer web-based application (Google Reader, which, according to this, accounts for 40Mb of memory space used). Where I get a little puzzled is when I looked at what Microsoft reported through its task manager:

The same 5 processes appear (but since Windows only knows them as running as chrome, it can’t identifty which is which but the numbers are very different: Chrome reports an aggregate memory use of 96,300K while Windows reports an aggregate memory use of 121,544K or 25,244K more. To be very honest, I don’t know which number is correct but, with only 3 tabs open (and the tabs I have on here are the minimum I have open at any time), I don’t find it very reassuring to see this type of gap appear. Will it get worse as I add more tab? I don’t know but it’s something worth investigating.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Google unveils web-based OS. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

Background

“People are concerned about your blog.” In the hushed world of banking, this was a clear sign that I was in trouble. People didn’t like my blog and it could become a career issue. At issue was the fact that I had an identity outside of the corporation and people were worried that what I was talking about on my site would be associated with the corporation in spite of my specifically mentioning that all opinions on this site are my own.So I was left with a couple of options: be quiet and keep progressing my career or find a place that would be more friendly to my blogging. I tried the former but, as more and more stories popped up, I found it harder and harder to be quiet. I wanted to comment, I wanted to write but I had to balance that against the idea of being gainfully employed in what was an otherwise good job.At the same time, I was getting a little antsy. I wasn’t happy with the workload. I was also thinking that I needed a change of scenery since I’d been at the firm for a long (in my view) time. I didn’t want to become a lifer and my options in terms of career growth were to move to London or Hong Kong, both open options but neither really appetizing to me. I wanted to stay in New York and I wanted out of finance. The goal became to restore a good work/life balance, to continue being creative and to be given enough flexibility in terms of what I could do in my private life.So I started putting out feelers to see if there were ways for me to gracefully get out and find something more in line with my media background.Why did I want to go back to media?In order to answer this, I have to give newer readers a little background about me. I’ve been involved in the media space since the early 90s and in the internet commercial media space since pretty much its inception. It is, and has always been my first love.

Why I went into finance

When I went to the banking side of the world, the attraction was two-fold:

• one, I wanted to learn more about money flow and how money moved around the world once you had sent it to a credit card clearinghouse.
• two, I wanted to work on large scale global project because they seemed much more challenging and therefore more interesting.

Along the way, I learned a whole lot of things. Six years in the financial world taught me how to properly manage global projects in a widely distributed environment. They also made me more understanding of the need for strong project management, the issues around regulations and a lot of legal stuff that I was aware of but had never experienced first-hand.All said, it was a great learning experience that made me a stronger project manager and allowed me to really understand how large organizations work and how to work within them. It also allowed me to mature as a manager. I have to admit that when I joined the bank, I may have been a good startup guy but I was not equipped with the proper skills to work in an organization with hundreds of thousands of people. Through a mix of great mentoring, amazing educational opportunities and lots of hands-on experience, the bank allowed me to acquire skills few people have.In this process, I also learned that transaction flows were actually relatively simple to understand, once you had properly dissected them and it gave me a couple of insights as to the nature of money (more on that soon).Fast-forward to today and there are a number of things on the horizon that gave me pause about the future of banking:

• Regulatory constraints have made banks hyper-conservative: this makes it very difficult to try to do anything innovative within the context of a large financial organization. The innovators generally tend to be smaller more agile players who don’t have as much to lose initially.
• The mortgage crisis is just the beginning: In talking with people who trade financial instruments, it is becoming clear that no one really understands the magnitude of the current financial crisis. People know it’s bad and expect it to get much much worse but no one has any idea as to how bad.
• Transactions are easy to understand but much of the innovation in finance is actually coming from non-financial actors. Margins on money transfers are dropping as regulatory costs are increasing and competition is increasing. At the same time, the real value of transactions is not in the transactions themselves but in the metadata associated with the transactions.

So looking at all this, I had to balance whether I wanted to stay in banking or do something else. That was the easy decision. The tough one was figuring out what something else would be.

Back to Media

I had options: with a second Internet renaissance looming, it seems that I could pretty much go to any startups. And, in putting out feelers, it was interesting to see how many were interested. What they were interested in were my ability to understand large scale projects, my strong project management background, and my understanding of large scale transactional systems.As they highlighted those facts to me, it became clear that the banking experience was a great entree in any area. So I had to choose.Fortunately, I also had a good background in media and the recent changes seem to line up with my thinking and skills:

• Media is increasingly becoming about transaction. For example, if one looks at the recent success of Google (an advertising company with a side business in search) and Facebook (and advertising company with a side business in lead management), it is clear that media is all about facilitating more and more and smaller and smaller transactions.
• Couple the previous point with the fact that most media is moving to the models that were established by the internet (or revenue is being siphoned from those media to the internet directly, as we’re seeing with newspapers) and it is clear that marketplaces will exist to mediate relationships between buyers and sellers.
• Large media companies could manage this change but they are still beholden to the formats they have stakes in. We’re seeing that with the music industry still thinking it sells plastic CDs instead of of its content, the movie industry thinking the same and the print industry being wedded to its printers.
• Because of that, the change will have to come from an industry that is not weighted down by a particular distribution medium.
• Traditionally, the industry that sells messaging and figures out distribution is the advertising industry. Media buying is the arm of that industry that is most likely to enact (and therefore profit) from the change. Large media buyers are uniquely positioned to help their customers present their message in a more effective fashion across media and, due to the unique expertise they are accruing across media are also the best ones to understand where the market opportunity may lie.

So with all that, let me get to the real announcement relating to all this:

I HAVE LEFT HSBC AND WILL BE JOINING GROUPM ON DECEMBER 3rd. 

Who is GroupM? What will you do there?

GroupM is the media investment arm of WPP, one of the (if not the) largest advertising groups in the world. In other words, it’s exactly the place to be if you believe in and are interested in the kind of change I highlighted above.Thanks to the great formation that HSBC has given me, I will be joining groupm as the project management office director for the company. In that capacity, I will head the company’s PMO and will work on a number of really interesting initiatives. Based on my discussions with the people there, I’m very excited about the opportunity and it also looks like I’m joining a pretty amazing team of very smart people (I hope I can help insure that the average smarts are not lowered by my presence).Also, I’ve worked closely with my new manager and the folks in H.R. to ensure that special provisions have been made relating to my blogging. The terms are fair to both sides and it will ensure that I can basically start blogging again in my spare time. However, I suspect that a lot of my blogging will go to more discussions of the changing nature of finance and money. The reason I had not written about that in the past is that, due to my working in a financial institution, I steered clear of anything that would relate to that world. But I did learn a lot about it and, more importantly, I did develop a few theories about it that I have not seen written about in too many other places. Now that I’m freer to blog, I think I can start writing more about it.At the same time, I might be more careful in my writing about advertising since that’s the world I’m moving back into. People hire me as much for my insights into a particular industry as for my other skills and I want to make sure that the keener ones are kept as a proprietary advantage to any employer.

Conclusion and Thank Yous

So there you have it. I’m moving to groupm; I’m leaving HSBC.However, before I close this out, I’d like to add a few thank yous to the people I have worked with at HSBC:

• First, I’d like to thank Kevin Newman and Raymond Cheng for giving me the initial opportunity. While both of them have moved to other parts of the organization, they were instrumental in bringing me on board and they are responsible for my initially joining and then staying on much longer than I had initially thought I would. Mark Martinelli also provided a fantastic guiding hand and a tremendous amount of sponsorship that probably ensured I’d stay on for an even longer period.
• I was also blessed with having to deal with a great management team. Over the years, mentoring by Rob Mian, Fred Hoysted, Gene Lavis, Bill McCloskey, and Mark Hibbard helped me better understand my own strengths and weaknesses and become a much more effective manager.
• I was also very lucky to deal with understanding internal customers like Larry Campbell, Daniel Hallac, Ian Haynes, Chris Walsh, Michael Artley, Joe Garner, Jeffrey Hughes, Bahvya Shah, Julie Lakha, Matt Dooley, Joe Garner, Julian Soper, Bev McArthur, Megan Heinze, Tom Cannon and Verity Coe.
• Internal friends worked hard to help me shape the best approach to problem resolution and, while it is hard to get every single name recognized, I’d like to also thank Satinder Sadhar, Simon Cox, Stewart Nacht, Kelly Hair, Fernanda Cabas, David Ruiz, Serge Besch, Vadim Permakoff, Venkat Lakshminarayanan, Aditya Kommaraju, Rajnish Jain, Amichai Lichtenstein, Stuart Bain, Pedro Crespo, Celia Bradley, Sarah Carroll, Sreenivas Duggiraala, Ainsley Rattray,and many others… It’s amazing that I could actually do all this off the top of my head and a testament to the amount of really great people working at HSBC these days…
• In 6 years, there are countless others I’ve interacted with who have made me a much better person. They’ve seen me grow as an individual and as a manager, they’ve forgiven some of my mistakes and they’ve taught me important skills. I will miss one and all but, at the same time, I’m excited about the new challenges coming ahead.

So looking back, it’s been a fantastic time at HSBC and I assume that it will be even better at groupm. There we have it, the big secret is out. I’m looking forward to the new challenge and I’m sure the new job will keep me very challenged and very busy but, at the same time, I’m also thrilled to be able to say that the blog will get more lively: I’m back baby and this time, I’m gonna stick around.…

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Transition time. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

The Music Industry

Take, for example, the music industry. Traditionally, the music industry has been based on aggregating multiple songs on a piece of media. Every few decades, they would benefit from the introduction of a new technology (for example, shifing from LPs to 8-tracks, then to cassette tapes, then to CDs) as people had to basically purchase the same good over and over again when they upgraded their equipment. Then came the concept of a digital track available via download. The music industry is trying to resist that change because the shift from selling pieces of plastic at a premium to buying individual tracks hurts them in two ways:

• first, they now have to ensure that every track they sell has the potential of getting some buyers. Gone are the days of packaging some sub-standard product with some better products in order to average out the difference. Now, every track has to fend for itself.
• Secondly, they can no longer rely on technology as a way to get sell the same track again and again to the same people.

So, of course, they are resisting the change. The issue they have with MP3s and downloadable music does not have to do with people sharing things illegally (as people have been sharing music illegally since the first days of recordable media) but rather because digital music has the potential of making their market a lot more efficient. Now that goods (in this case, songs) are parceled out in their most atomic way, there is no room for them to repackage them into something bigger that may be 10 percent good and 90 percent useless. Their approach to fighting things, of course, is to sue and attempt to create a new closed system through the use of digital rights management (DRM) in order to protect their advantage.

The advertising industry

Another industry getting hurt by the Internet is the advertising business. Traditional advertising business have been based on selling a general audiences to advertisers. The model, however, was based on the concept that some percentage of the audience would buy the product. What was always in question, though, was how much that number was. Then came the Internet with its easy to measure model. Ad banners were measurable but response rates were low. Then came google, with its rich contextual advertising model and its offer to charge advertisers only for the clicks they received. This started to change expectations as to what is now expected of advertising. As a result, advertisers are becoming more demanding of traditional media, requiring more information about the effectiveness of their purchase. Television, newspapers, radio are now considered less effective, because they can’t provide the rich tracking data that the internet does. The net result of this is that advertising is becoming more efficient. Along with that efficiency comes the fact that less dollars will be wasted and therefore less dollars will be spent. Because expectations have changed, advertising is suffering. Their model is evolving and they’re having difficulties adjusting.

The phone industry

The Internet is also starting to hurt the phone industry. The recent announcement by Gizmo that they would offer free calls is just another thing highlighting how the phone company model is broken: traditionally, phone calls have been very cheap to deliver (in an order of magnitude much lower than 1 cent) and phone companies have been charging a very large amount for those offerings. Voice over IP is undermining that, showing people that phone service can be very cheap. In the US, the telcos are trying to fight this by attempting to create a multi-tiered internet where such services would not go through. That model is doomed as mesh networks could undermine their ability to do so. Once again, efficiency is making a product much cheaper. At that point consumers win and the remaining players are making good money but are playing in a marketplace that is much smaller than it used to because inneficiencies have been worked out of the system.

Services

Service providers who do not need to have a foot in meatspace (accountants, lawyers, etc…) have the potential of being affected too. In “The World is Flat”, Friedman argues that this type of work is shifting overseas. He’s right and the long term trend has the potential of shaking up many services industry by providing those services at a much cheaper rate. Once again, the introduction of the internet and globalization is making a market more efficient (hence cheaper costs) but leaving behind a much smaller marketplace.

What to do?

When this stuff happens, the only thing you can do is figure out how to move upstream or change your business model. Large corporations are generally slow at making those types of evolutions but it’s a make or break scenario: adapt or die. The process can be painful: One of the first thing to do is figure out where your fat is and reduce it. This means getting rid of people who do not provide real value. The second part is figuring out which part of your business are highly efficient and invest in innovating with those companies. Ultimately, costs will continue dropping and survival will continue to be about increasing efficiency.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Ruthless Efficiencies. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

We are already starting to see the beginning of that phenomenon with Voice Over IP, which moves the traditional phone communications over to the Internet. Similarly, television stations are starting to experiment with distribution over the Internet, moving what was once running on a different network to the Internet.

IPzation represents a threat to a number of existing business models because it represents a shift from traditional inefficiencies that were taken advantage of by large providers to the Internet.

Assuming users won’t catch up

Telephone companies were safe in the knowledge that, as long as they had control of the telephone infrastructure, they were assured a near-monopoly over that type of business. They have managed to parlay some of their initial advantage into a position where they are offering a way to access the Internet (via DSL, for example) but are starting to see competition from other entities with access to the home, like cable companies, for example, which have managed to use their access to household’s TV screens to create another way to access the Internet. Because the communication layer is happening over IP, the applications can run on either network without any problem, creating a more competitive market.

However, built into the business model around providing DSL or cable access to the Internet were large subsidies to the telecom providers. For example, a DSL line currently only takes a couple of dollars to provision and maintain. The same economics are true of the cable industry. The reason for that low a cost is that the assumption, based on previously established Internet usage patterns was that users were not going to use the full service they were provided all the time. As such, providing what looked like large pipes to the Internet was predicated on a model that assumed that users would use those pipes in a sporadic manner (fetching email or downloading a web page) which could balance access to the larger pipes and distribute it across users.

As more bandwidth-heavy applications are arriving, the telecom providers are starting to complain that they cannot support users following that model. Basically, what is happening here is that they have sold a good they cannot deliver at a price point they cannot offer. Because they have overpromised, they are now starting to worry that users will actually use what the telecommunications companies claimed to offer.

The inefficiency they had assumed was wiped out by Internet Protocols because such protocol allowed for offering services like the telephone or video over the network, something that telecommunication providers had assumed would not happen. Because telephony and video went through an IPzation process, the telcos need to rethink their business model.

Assuming a geographic hedge

Television companies used the geographic boundaries in terms of distribution of content from a TV station to create affiliate networks of TV stations that each had their own business protected in terms of their local area. As such, one could not find two stations offering the same show at the same time in the same geographic region.

There are a number of assumptions here: assumption about physical space, assumption about time, and assumption about monopolies. The economics of television are now faced with challenges as IPzation takes place because those assumptions are no longer valid. Digital Video Recorders have broken through the notion of time-slots and new devices like the SlingBox are breaking through the notion of space. The TV networks are trying to fight back by starting to offer some of their products over the Internet.

However, in order to fully understand the long term impact of IPzation on the TV business model, one needs to take a step back and start thinking about what business TV stations are in and that business is one that is based on another set of inefficiencies. I am talking here about the advertising business which, when it comes to television, relies on delivering an audience to advertisers and charge a premium for it. John Wanamaker, the father of the department store and the father of modern advertising was known for saying “Half the money I spend on advertising is wasted; the trouble is, I don’t know which half.” TV advertising models were largely based on that old model. The came Google and advertisers started demanding more information about what it was they were getting from those audiences. As Internet advertising has become more prevalent, the notion of of measurable results has gained mainstream acceptance among advertisers and they are now demanding similar types of metrics from other business and TV station find themselves in the cross-hair.

This is another effect of IPzation. As more and more businesses get transacted over the Internet, the common standards created around IP technology force the companies to rethink their approach. IPzation is ruthless in its dissection of core business practice because it is technology and, ultimately, technology does not care about people because it is not sentient.

This is the third article in a 6 part series. You can read the following parts here:

• Part 1: Intro
• Part 2: Always on
• Part 3: IPzation
• Part 4: Sensors
• Part 5: Participatory Applications
• Part 6: Conclusion

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Future Tense — IPzation. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

Broadband penetration

Broadband penetration will continue to increase in the United States and Europe. Large scale deployments of city-wide broadband efforts in several large cities will start making internet access similar to phone or electric service, widespread and the type of thing few people think of. On the bleeding edge of the Internet access development world, some large scale networks, most probably coming from phone companies, will break the 10-Mbps barrier and close in on the 100-Mbps speed, making internet access on par with regular local network access.

The downside of this widespread deployment of high-speed internet access will be in the phone industry, where next generation (3G) rollouts of high speed wireless networks will prove costly and offer lackluster service considering its high price. This will force a drastic reduction in prices towards the end of the year or early 2007, in an attempt to recover some revenue from the large investments.

Implications of increased broadband penetration

The increase in broadband penetration will have several large implications, including the rollout of more voice over IP services, video services, and the infrastructure security.

Voice Over IP

Voice over IP will continue to see widespread deployment and large phone companies will start migrating their full networks to IP-based traffic. This will make VoIP the primary form of telephone communication for wired lines by the end of 2006, though few people will be aware of the change as it will largely happen behind the scenes, not touching people’s independent system.

Telephony services will increase as the VoIP phenomenon continues to increase. Expect early efforts in video telephony to start rolling out and becoming more mainstream towards the end of the year. Also expect to see the rise of wireless devices that can bridge the gap between computer and regular telephony, providing access to the network in a number of different ways.

Video

Video over IP will be very hot in 2006, with several major changes in the industry. First will be the announcement, by Apple, of its new mac-mini intel-powered platform designed specifically for the living room. Following on the success of the iPod, Apple will market the device less as a computer and more as a video consumption tool that will include stunning high definition resolution and will offer direct access to the iMedia store (formerly known as the iTunes music store) where one will be able to download movies and TV shows, as well as content created by amateurs.

Google, in partnership with AOL (and its sister companies within the Time-Warner world), will offer a pay-per-view system, mirroring some of the iMedia store offerings. The system will be available both in the AOL closed garden client (where it will use some level of acceleration to speed up delivery) and on the web through a new client package offered by Google and largely developed by the AOL client software team. The strength of the move will generate enough positive buzz for AOL that Time-Warner will be able to spin-off the unit and will be considering an IPO towards the beginning of 2007.

Seeing their advertising revenues eroding, TV stations will start offering more content online, also sponsored by advertising. New types of online video ad insertion and tracking system will be created by several companies, with Google, Microsoft, and Yahoo! offering aggregated model based on something similar to Google AdWords but offering not only targeting based on keywords but also based on certain demographic information.

New video aggregators will start appearing, offering a way to customize your own TV station. Some will be acquired by the major portals (unless the portals themselves have already developed that capability by the time this trend manifests itself). Meanwhile, Tivo will recast itself as one of those portals and will be acquired by Microsoft and merged with MSNTV (unless it is acquired by Sony, and merged with the PlayStation 3, or Panasonic, and kept as a standalone.)

Having lost in the bidding war for Tivo, Yahoo! will decide to acquire NetFlix and merge it with some of its video offerings, providing not only distribution of DVDs but also online streaming of content.

On the strength of revenues from online ads, some small cable or local TV stations will start offering their complete programming slate online, for free, and adverting supported. This will rankle a few of the cable companies and syndicators who looked to those companies as another revenue stream. Meanwhile, on the same basis, most local TV news will be available online for free through an advertising supported model. During one major story, a local TV station’s feed will compete with the national networks in terms of reporting, as more viewers flood its website than watch the same story unfold on television.

The competition for those types of stories will continue to increase, as citizen journalism provides raw unscripted video of events. Videocasting, following on the success of podcasting, will start seeing some traction with a few podcasting and vidcasters signing deals with traditional media. Traditional media will look at it as an interesting set of development but one that ultimately won’t be trusted by the public because they do not have the right seal of approval; their prediction will turn out to be wrong.

Infrastructure

The rise of broadband and the increasing numbers of basic services running on the internet infrastructure will give rise to fear that the infrastructure is under-protected. From a technical policy viewpoint, electronic infrastructures will become a major national security matter with fears that the very openness of the internet could represent a large security risk. This will be seized upon by the network providers (phone companies, cable companies) and some security consultants as a way to push for policy that will allow those incumbent communications services to administer their networks with tighter control, with decision as to what they are willing to let run on the network and what they are not willing to. A subsequent battle will ensue as VoIP companies and media companies will complain about the network providers squeezing them out. No decision on any of this will be made in 2006 but the debate will continue through 2007 and beyond.

Growth and Scalability

2006 will be an explosive year in the Web 2.0 sphere. Explosive because it will see triple if not quadruple digit growth in number of users but also explosive because it will see several popular sites unable to deal with the capacity issues relating to that explosion.

On the RSS end, the explosion in growth will really start when Internet Explorer 7.0 becomes a priority upgrade on windows stations. The inclusion of some RSS feeds as defaults in the browser will prove to be too much for some sites which had not expected the onslaught of millions of new hits. Readership from RSS readers will increase as more users realize that they can get their favorite sites delivered to them instead of going out and checking to see if they are updated.

As more people discover RSS, more of them will start valuing blogs and many will start their own. However, the concept of becoming a professional blogger will decrease as many people who thought they could make money off their blog will find that the effort in doing so was higher than they had expected and will abandon their blog.

Meanwhile, other web 2.0 subjects will fail: Tagging services like del.icio.us will be see as too complicated by the general public (although they will continue to thrive in the more geeky world) but tagging of pictures (as in Flickr) will continue to grow. Most blog networks will fail to attain the amount of traffic required to play seriously in the advertising world and will be forced to either merge or shut down. Meanwhile, companies offering only a set of web services with the idea to generate revenue solely from advertising may find themselves in a bind as advertising revenue will fail to grow at the same pace as the new offerings.

Implications of Growth

The explosive growth in traffic see during 2006 has implications across a number of players in the blogging world and metadata space. It also has implications in terms of scalability, business, and trust.

Blogging, podcasting, vidcasting

As blogging takes better hold in the mainstream (your parents WILL be blogging), the number of subscribers per individual blog feed will drop into the low teens, with blogs being read by close family members and friends only. A few breakout blogs, specializing on particular narrow subjects will manage to increase their readership but the world will largely consolidate around less than 1,000 major blogs: of those, the vast majority will not be from any members of the Technorati 100 or any other such list. The vast majority of those mainstream blogs will be the ones created by mainstream media outlets, which will use their existing reach to heavily promote their own blog.

Radio stations will increasingly start offering podcasts and TV stations will offering vidcasts. Most, however, will do so through centralized hosting capabilities provided by their parent companies. Smaller podcasters and vidcasters will have a hard time to compete with those larger companies as they are forced to look into ways to support their own bandwidth costs and will sign contracts with hosting services promising a share of advertising revenue in exchange for doing the hosting: that share will largely go to the hosting service with many podcasters/vidcasters finding they are not really making more than a few 100 dollars a months from all their hard work.

Crash and Burn

One of the hosting services will crash in a major way, taking with it a few days worth of the hard work of thousands of people who were hosting on it. The provider will initially recover but suffer a subsequent crash that will seal its fate as a doomed company. The majority of its users will leave and join one of the larger hosting services provided by Yahoo!, Microsoft, and Google.

Beyond the hosting world, scalability will also be a hot buzzword as more services, ranging from RSS hosting providers like FeedBurner to search engines like Technorati and Feedster to analytics providers like Google and MeasureMap will experience temporary failures and growth pains.

The cost of upgrading the service infrastructure will be too much to bear for some companies, which will be forced to shutter their door, sell out, or merge with a similar service. Meanwhile, many web-based service companies will fail to generate enough advertising revenue to continue upgrading. A flurry of mergers and closures will happen over a few months, leading people to wonder if this is bubble bust 2.0.

The downside of all those fears about a bust will be in the increased number of negative stories about technology in the mainstream media. Stories will mention the hubris of web 2.0 founders and will showcase Google as a typical example of this hubris, highlighting its free lunches and other things that were thought cool in 205: As a result of all those negative stories (and others but more on that later), Google will loose several billions (possibly even tens of billions) of dollars from the high of its market capitalization, shedding anywhere from 10 to 25 percent off its high.

After the consolidation, there will only be one or two independent players in each of the following (notwithstanding the fact that there will also be offering from the bigger portal players): blog hosting , vlog hosting, podcast hosting (WordPress and Typepad will either be the two in these three sectors or will have merged), blog search, social networks (speaking os social networks, Yahoo! or Microsoft will buy LinkedIn (if it’s Microsoft, LinkedIn will quickly be integrated with Outlook and offer Plaxo-like features).

Meanwhile, a sector which will have been decimated will be tagging. Following slow adoption by the mainstream, largely due to the complexity of adding tags to pages, many tagging companies will fail. Tagging, as a concept, however, will remain and be adopted by most major search engines: as Metadata entry is simplified with the introduction of Windows Vista and Office 12 (both of which will be delivered by Microsoft to a relatively lukewarm market), and tagging becomes a browser feature, it stops being a differentiator.

Trust is hot topic

Fear of Google knowing a little too much about people will bring a slate of bad press for a company that was the darling of the mainstream media in 2005. The introduction of its Google finance service, hooking up into people’s bank accounts and payments systems will be seen as the company becoming too large a player, with fear of it becoming a monopoly. The backlash will first start in silicon Valley, with many tech luminaries starting to tear down the company. It will continue with publications that were once its biggest cheerleader becoming its biggest detractor. As a result, many of the companies that relied on Google for key services (advertising, analytics) will try to distance themselves from it and start looking for other providers (meanwhile, companies looking for funding will excise Google from their business plans, in order to avoid being associated with it by VCs). Yahoo! will pick up some of the adsense/adwords business, along with Microsoft, which will offer a similar service.

Meanwhile, in the analytics space, new companies will be formed and attract a lot of venture capital. Many of them will offer ways to opt-out of their tracking and some will offer added incentive to people willing to provide them with more information. New models in the space will emerge and at least one player will provide a revolutionary approach that will change the analytics landscape.

In the blogosphere too, trust will be a major subject as some of the top bloggers will grapple with issues surrounding defamation of character, libel, accuracy, and reliability after a top-name blogger is sued for something he/she said or linked to. Furthermore, some of the top bloggers will grapple with issues relating to invasion of privacy as they become more famous in the mainstream media.

On the Wikipedia end, anonymous editing will be abandoned after the revelation of a major hack altering minor facts over several months in an automated fashion has rendered a core version of the wikipedia unusable. The wikipedia trustee will revert wikipedia to an earlier date, erasing all changes performed during that period of times and destroying several significant entries on 2006 current events. The mainstream press will pile on about the inaccuracies of wikipedia, bringing back earlier scandals as proof that no information on the internet can be trusted unless it comes from a reliable source (incidentally presented as being a member of the media establishment).

Conclusion

In late 2006, a substantial portion of these predictions will be wrong and some may turn out to be dead on (although most of the ones mentioning companies by name will most probably be wrong).

Meanwhile, on a personal level, 2006 will be a year of big changes. However, I promise it will also be a year of continued writing on TNL.net, even if it is at the same substantial post every week or two rate that readers have gotten accustomed to. I hope you’ll join me for the ride.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title 2006 Predictions. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

This week, Google introduced two new Firefox extensions: Google Safe Browsing and Blogger Web Comments which are providing richer integration with the desktop and a number of new features based on your surfing patterns.

But the question, when looking at those is why is Google interested in areas that don’t seem that close to search: the truth is that they are closely tied to Google’s business model, even though it’s not totally clear on a first look.

The Google business model: advertising

When you look at Google’s revenue, it becomes immediately clear that search is not really what the company is about: Google is in the business of advertising and search is the way in which it targets its advertising properly. Viewed in that prism, Google is an advertising company and advertising companies generally need a couple of things: eyeballs and data about those eyeballs.

The first part of this is easy to understand: eyeballs, to an advertising company, represent the inventory it has available for sale. However, eyeballs in and off themselves are pretty useless. The common misconceptions made by many companies in the late 90s was that eyeballs alone were important. The truth is that, without any other type of information, eyeballs are close to useless.

However, the more information you have about a set of eyeballs, the more useful it becomes. This was the realization that Google made when it moved the advertising model on its head by targeting ads based on search terms. Google then increased the amount of eyeballs it could get by offering AdSense, a program that increased inventory and provided information back to Google about what people were looking at.

With each new member of the AdSense program, Google gets more information about Internet users. The more information it has about Internet users, the better it can target its advertising.

Enter the add-ons

In May, I posited that the Google Accelerator was about distributing the indexing work. What I failed to realize at the time was that Google was also getting a lot of user information in the process: what do people look at, how long, etc… This information is extremely useful. However, the accelerator had some issues and failed to achieve high velocity.

More deals have followed, with large partnerships aimed at pushing the Google toolbar on as many desktops as possible. One could wonder why the toolbar is so important to Google. After all, they keep trying to get it bundled left and right (with Java, for example) and are pushing it very heavily in their search engine results page. The toolbar is all about getting more information about what people visit.

The new extensions are about the same thing: getting to know you better. The Google Firefox Extensions Agreement spells it out very clearly:

By using the Extensions, you acknowledge and agree that Google may access, preserve, and disclose information regarding your use of the services if required to do so by law or under other conditions set forth in the Google Privacy Policy

Digging into the privacy policy spells things out clearly (the emphasis is mine):

• Google collects personal information when you register for a Google service or otherwise voluntarily provide such information. We may combine personal information collected from you with information from other Google services or third parties to provide a better user experience, including customizing content for you.
• Google uses cookies and other technologies to enhance your online experience and to learn about how you use Google services in order to improve the quality of our services.
• Google’s servers automatically record information when you visit our website or use some of our products, including the URL, IP address, browser type and language, and the date and time of your request.

From here, we learn that Google aggregates data (no big surprise here) and can share it with third parties. Among some of the data is the URL you visited, your IP address (which can then provide some information about your physical locations), and the language you use. Those are all good attributes to narrow down information about a user. For example, if someone looks at a lot of technical web sites, Google will know that this person might respond better to a technical ad. Over time, that information can be aggregated to get a better understanding of different groups and sell very targeted advertising. Let’s look at how Google uses this information (once again, emphasis is mine and this is from their privacy policy):

• We may use personal information to provide the services you’ve requested, including services that display customized content and advertising.
• We may also use personal information for auditing, research and analysis to operate and improve Google technologies and services.
• We may share aggregated non-personal information with third parties outside of Google.
• When we use third parties to assist us in processing your personal information, we require that they comply with our Privacy Policy and any other appropriate confidentiality and security measures.
• We may also share information with third parties in limited circumstances, including when complying with legal process, preventing fraud or imminent harm, and ensuring the security of our network and services.
• Google processes personal information on our servers in the United States of America and in other countries. In some cases, we process personal information on a server outside your own country.

If you remember my first point (Google is an advertising company), it starts to click. The technology and services they provide are not necessarily to the end user; they can also be to advertisers. This is why there is little worry about Google identifying you personally but being able to provide aggregated non-personal information to a third part is what advertising is all about.

In the television world, much of that work is being done by Nielsen (the infamous Nielsen ratings) to define what the audience of a show is and target the advertising properly. This is where the ideas like “give me around 100,000 eyeballs for men 18–24 in the New York area” yields an ad on a sports show about a New York sports team.

However, Google can do that better in that they can offer advertisers something along the lines of “17,000 eyeballs of 19 year old men based in Manhattan, NY with an interest in the Knicks and the Xbox 360, who also read sport news three times last week from ESPN, like the Daily Show and bought hardware and books from Amazon.com in the last 30 days.” It may sound extreme but let me explain how it works:

• The bought hardware and books can be gathered from the fact that they looked at URLs on Amazon.com and ended up on a purchase path as a result of that session (this would all be URL info)
• The same can be true of the ESPN.com and theDailyShow sites (gathered from the URL field)
• The interests (Xbox, the Knicks) can be inferred from where they spend time in their online session or what they searched for on Google
• The location (Manhattan, NY) can be inferred from the IP address they used during their surfing session (alternately, if they use Google WiFi, it can be gathered from the info that client has reported)
• The 19 year old men can be inferred from their email (Gmail) or usage patterns (this is where the research and analysis part come in) as relating to other 19 year old men

In fact Google is so sure of their data that they will guarantee advertisers that, if their ad did not get a response, they don’t pay for it. The TV station doesn’t do that. Once you’ve run the ad and they verified the audience, if you’ve met the number, you’re good.

Let’s assume that you have a million dollars in advertising to try to sell your new widget (which targets that public): where would you put it?

The rich data set that Google is building has tremendous monetary value and that is why they keep pushing new clients that provide them with more info.

Attention as value

Because that data is very valuable, the current stream of organizations like AttentionTrust is one thing Google will have to deal with down the line. Such efforts are actually putting the power in the hands of the users and could potentially represent a threat to Google, if people refuse to start providing data to it. It will be interesting to see how Google deals with this new world.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Getting to Know You. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

The company is part of a group called Media Heights, a company that also includes two other divisions: Impulse Interactive and MarketResearch.net. It has been very successful in the email marketing business, lining up blue-chip customers like Amtrak, British Airways, HP, McAfee, New Line Cinema, Sprint, Verisign, and Warner Brothers. Obviously, none of these company seem to know (or care) that their message is being sent to people who did not request it.

The company does use a number of database partners to accumulate its collection of email addresses. Here’s where each of those partners stands when it comes to selling email:

Bigmailbox.com: We may share, rent, or sell personally-identifying information you provide us to THIRD PARTIES.

Dialpad: The information that you provide is never sold to third parties.

IPO.com: This site is now closed and therefore, those emails are no longer part of any contractual agreement a user may have had with them.

Got2goshop.com: We may share, rent, or sell that volunteered personally-identifying information you provide us to THIRD PARTIES. (incidentally, that company is also related to BigMailbox mentioned above)

EyeballChat: Eyeball Networks also uses personal information to inform you of promotions, specials and surveys if you have opted to receive these. Users who set up an account with or log onto the Eyeball Chat Service with the applicable box checked consent to the use of their email address and other personal information to send electronic advertisements and promotions. Eyeball Networks may also use personally identifiable information to maintain standards for the Eyeball Chat System.

Except for information used to send electronic advertisements and promotions, as described above, Eyeball Networks does not sell, rent or lease any of the information collected to third parties.

ZDnet (now part of CNET networks): We have engaged companies to work with us or on our behalf to provide a product or service that you have requested, such as opt-in e-mail announcements

MovieLand.com: We may transfer or otherwise disclose information collected from visitors to our Web site to our employees and independent contractors, to our parent company, subsidiaries and affiliates, and to our consultants, other business associates, and suppliers, if the disclosure will enable that party to perform a business, professional, or technical support function for us, or if required to do so by law. We may also disclose information we collect from our site visitors to our marketing and business partners, who may use the information in connection with their business operations, such as to send marketing and other communications to visitors of our site. We may also share, rent, sell, or transfer any personal information (including financial information) provided by our visitors to third parties.

NetBroadcaster.com: During the registration process, and at certain times during any member user session, we may present you with additional offers from third party service providers. Some offers are optional and typically presented as “yes/accept or no/decline” questions. A checked response or yes/no button selection indicates your preference. Certain offers may be presented with a pre-checked preference/selection. If you do not deselect (opt-out) the checked boxes on our join form then we may transfer your profile information to that third party service provider. Our third party service providers have their own terms and conditions and privacy policies. We suggest that you visit their sites and review their terms and conditions and privacy policies before you “opt-in” to any offer. We may share, rent, or sell personally-identifying information you provide us to THIRD PARTIES.

SweepsClub.com: Sweepsclub.com will not disclose any of your personally identifiable information except when we have your permission, under special circumstances — such as when we believe in good faith that the law requires it — or under the circumstances described below.

Online Marketing Partners: Many programs or promotions offer opportunities to request additional information from our marketing partners. By requesting more information, you give Sweepsclub.com permission to transfer your personal information to our partner so it can fulfill your request. Marketing partners listed on Sweepsclub.com have separate privacy and data collection practices. Sweepsclub.com has no responsibility or liability for these independent policies.

In addition, Sweepsclub.com may utilize the services of one or more third parties to facilitate the transmission of emails, advertisements and/or other information. In connection with such services, these third parties and/or their agents may have access to your personal information.

Delphi Forums: Delphi Forums uses 24/7 Media and other third-party advertising companies to serve the ads that you see on our site. These companies may use information (not including your name, address email address or telephone number) about your visits to this and other web sites in order to provide advertisements about goods and services of interest to you.

Now if you look at it closely, a number of the partners are either dead or have stated policy expressing that they never sell or transfer email addresses. How could they be considered opt-in partners in those cases? The company also says that

Currently, over two dozen Database Partners work directly with Email Results

but only discloses ten of them, including one that no longer exists.

The next question in this is who are the other 14+ companies that Emailresults.net uses. If this were a case of a single incident (but people who have emailed me have shown that it’s not and subsequent research in Google Groups shows that there is a pattern of abuse here), it would be an innocent incident. Unfortunately, it is not and I’m afraid that other companies could get hoodwinked into using the dubious practices of a company that can only be seen as a spammer.

For those of you interested in avoiding further spam, there are two sites you might want to look out when giving out email addresses: The first one is called Mailinator and a more advanced one is called Spam Gourmet. Both these sites allow you to create addresses that can’t be used for spam purpose. Enjoy!

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Uncovering a Spammer. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

I don’t watch TV so television advertising doesn’t work on me. I listen primarily to public radio so, apart from placements in the form of contributions, I can’t be targeted there. I read a paper (the New York Times) every day and a bunch of technical magazines. What I get of pop culture is from flipping through magazines at the supermarket cash register, or reading about it online.

Online, I not only read the mainstream sites but also a number of blogs. I could have been blissfully unaware of the existence of raging cow, had it not been for the pointers to it from several blogs. Does the existence of the blog matter to me? Not really since it’s not a product I would buy. But what about a product I might buy? Would my perception be affected? THIS is the question that I have.

There is no doubt in my mind that marketers have a presence in the blogosphere and will continue to increase. As a result, the line between shills and individuals is going to grow increasingly hazy. If someone goes to a product launch (let’s say a new piece of hardware) and get a goodies bag and some free food and drinks, and then goes and blogs about the event, are they shilling? It’s not clear and that’s what I’m trying to solve with the full disclosure feed. I want to try to establish a way for people to be able to tell that there is a relationship between the writer and the product or site or whatever written about. How can we do that?

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title astroblogs. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

Here’s how it works:
First, there’s an XML definition to say this is an XML feed:

This is followed by the tag which says this is my full disclosure feed.

Generic information similar to an RSS feed includes the weblog title, weblog URL, the RSS URL (this is important because some people may only read a site through an RSS reader), the type of site (this can be either personal (for a personal site), corporate (for a site run by the corporation pushing the product), or marketing (for marketing agencies, advertising agencies, public relations companies, and other outside agencies promoting a product on behalf of a client), and a contact part (this can either be an email address or the URL of a web form to contact the person or company).

We then go into the section For every type of ad, we include a „ , and . Let me go into more details on this:

Type

: There are a number of ways in which a marketing placement can appear. It can be through the form of a banner, a button, a pop-up ad, a text-ad (similar to Google textads or metafilter’s), a links (within a blogroll, or navigation area, or an entry. If you want to make it clear, you might want to include all of them, or you can pick and choose which ones you will include.

Compensation

: This covers what kind of compensation you received. It can be none (if you just want to say we don’t run this type of ad), goodwill (if you think you’re going to get good karma out of it), cash (the hard stuff), product (if you got a free product out of it) or link (for example if you link to a friend and they link back to you).

Value

: This is a free form field where you can list what is the value of the goods, services, money you received. Some of it could be free traffic, for example.

Entry

: This one is in the off-chance that one day, you did decide to do a one-off deal on a particular entry or if you want to section off particular types of marketing to a particular section. It can be all (for all entries), none (for no entries at all) or a URL (which would be the permalink of the particular entry this applies to).

That’s about it. I just mocked it up in a few minutes so I expect a lot more fleshing out to happen. In that attempt, I invoke the LazyWeb to discuss further.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Marketer, Marketer, where have you been?. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

On the left, you’ve got Google, the 2000 pounds gorilla of search which is now looking to expand its advertising program beyond its site and is fighting to not have its name associated with searching on the Internet. However, playing to its advantage is that it now owns a patent on its ranking technology.

On the right, you’ve got Overture, which once had a business that most people figured would fail (after all, who would pay for a placement in a search engine?) but somehow managed to prove the naysayers wrong and is now going out and buying itself a new seat at the search table.

At stake is the future of search but it may be much more. It looks like the market is reshaping itself to become not just about search but also about targeting. Give the right search result, attach the right ad, and all of a sudden you’ve got a redefinition of online advertising networks. The funny thing is that we’ve been there before. This was what Doubleclick promised but eventually abandoned due to privacy concerns. I suspect that the search engines are headed in a similar direction and that history might repeat itself here (and I suspect that we may see more people starting to worry about privacy issues similar to those that plagued Doubleclick a few years ago.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title History repeats itself. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

The genie is out of the bottle

Yet, I can’t help but believe that the shutdown of Napster will not do much in terms of limiting distribution of online music. People will now move to alternative services like Gnutella and Freenet. In other words, it’s time for the recording industry to face the music.

Shawn Fawning and his crew did, in the words of the judge,

create a monster

but I seriously believe that if the goal of the RIAA is to stop widespread distribution of digital music, this lawsuit is a moot point.

Back in March, I talked about Gnutella, a Napster-like client/server applications that escaped from AOL’s vaults. Since then, Gnutella use has increased, largely due to the fact that Napster was being sued and that Gnutella has no controlling authority. Since no one is officially in charge of Gnutella, no one can be sued. And since the service can’t be sued, it’s a much tougher one to deal with as far as the recording industry is concerned.

With the shutdown of Napster, I believe that people will look for alternatives. After all, 20 million people have gotten hooked on the chance of getting free music, why would they immediately stop? And Napster, the phenomenon, will live on, as more Napster-like tools start proliferating around the net.

So what should the music industry do? Should it go out and try to shut down every single such service that pops up? I seriously doubt that such an effort would succeed. What I believe they should do is look at ways to use those tools for promotional uses and try to create a new revenue scheme for online music.

New revenue models for online music

Subscription: One of the most popular model being floated around in terms of making money from online music is the concept of subscription-based all you can eat models. Emusic is a pioneer in that space, now offering a monthly $19.99 subscription giving users access to 125,000 MP3 tracks. I believe this model is correct but I am still having a hard time with the price. The basic question is one of price. Why would people pay as much for music as they do for connectivity? I believe that this model will work only if the price is lowered to around $10 per month.

However, I’d like to offer a couple of different models.

Music as premium

: In the United States, there are two kinds of cable TV service: basic and premium. The basic set allows you to have access to a large number of advertising-supported TV stations. The premium channels are available for about $10 each and are offered without any advertising. They usually offer movies and special programming not available anywhere else. I believe that an ISP could look at a similar model. Pay $19.99 for basic access and, for an extra dollar amount, $5 to $10 maybe, get access to a music collection. There might be some incentive for particularly new music sets. Or companies could offer certain songs for free, as a promo, and give access to the full album or collection for a few more dollars. That way, the music industry gets some revenues from the distribution of digital music and everyone’s happy.

Digital Jukebox

: This is a little more complicated technically as it requires some kind of micropayment mechanism. Basically, think of it as Napster with a pay system. Songs would be available in a model similar to Napster but, for each song, a price would be attached. This price would have to be equivalent or lower than the price the user would pay for a CD, and the user would receive a bill at the end of the month for the total amount of dollars they have to remit. Access to the service would still be free but some of the songs would cost money. As a result, the music companies would see the revenues they think they are losing and post some of the promotional material for free. However, the problem with that particular approach is that it does not cover replays. As a result, a user may download a particular song for � cent and not have to pay anything extra. A possible solution to this issue would be to take the cost of a CD, subtract the production costs, divide the remaining number by the number of tracks on the CD (let’s assume that, on average, the production costs for a CD, its case and its cover is around $3. If that CD sells for $12 and has 10 tracks on it, each track would cost 90 cents) However, in order to make this truly attractive, this would still be considered a high price. Drop it by a factor of 10 or more and it may start becoming low enough for people to consider it.

Pay-per-minute model

: This would be somewhat similar to phone service. Users would pay for minutes of airtime on a service. However, the price would have to be low enough to make it tempting for the users. Something along the lines of a portion of a cent might be reasonable.

Advertising-based model

: This would essentially have the music label distribute the music around the net but tack a front and a back bookend advertising message. They would charge advertisers a premium, as the message would be played every time a song is run. Even though I am suggesting this, I’m still dubious as to its effectiveness, as users might find a way around it.

I don’t believe that any of these are the sole answer but I am putting them out as as suggestions. If evolved properly, they could be the beginning of a new way to sell music.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Napster Shut Down. You can follow him on twitter here or receive his weekly newsletter by subscribing here.