KarmaWeb

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Thanks Richard…Great job putting the piece together and with all the pics etc.

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Irrational behavior at eBay

Updates on SezWho…here and here

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I want to apologize for being tardy in posting last month…We have been busy moving our blog over to a new location.

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For those of you using RSS, please update your reader to point to our new RSS feed.

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We will no longer be updating this blog…In any case, drop by and say hi at our new digs.

Fascinating post on MSNBC about the price users put on Privacy…The post talks about experiments where users were asked how much they value their private data. Customers were asked the question in two ways:

• How much are customer willing to pay to protect their privacy?
• How much do customers want to be paid to share their private information?

As expected customers wanted a whole lot more money to share their private information while very few were willing to pay to anything to protect that information. I think people have this assumption about privacy that its something they just have…and I think its an artifact of how things used to be before everything changed because of technology. We now need to reexamine our assumptions about how much we really value privacy and come up with a more rational value (rather then have endowment effect and other psychological factors skew our judgement) … This is too important for everybody.

I have been meaning to do a summary of online Ad spending and the trends for a while…So it was good to see this piece in WSJ by Emily Steel that had a lot of numbers and trends:

So the current numbers are “Internet advertising has grown into a $16.9 billion industry — 5.9% of the $285 billion total U.S. advertising market in 2006, up from 4.7% in 2005, according to the Interactive Advertising Bureau.”

The article has a good cast of characters that make up the online ads space. Below is my summary of all the species:

Paid Search

1. Search Sites: Up until now, paid search has benefited just a handful of players, particularly Google and Yahoo because those ads have mostly attracted smaller businesses that don’t use ad agencies.
2. SEO Agencies: With bigger companies becoming more involved in paid search, agencies and search-marketing firms are playing a greater role. Also firms have sprung up to help marketers design their Web sites to make it easier for search engines to understand what information appears there. The goal of this “search-engine optimization” is for a company’s Web site to show up at the top of a search engine’s free results listings when a person is looking for information related to that particular company or industry.

Branding Ads (banner ads, animated adds,  etc.)

1. Digital Ad agencies: ads are usually designed by digital ad agencies and then transported to various Web sites through a circuitous route often involving a number of technology-focused companies. It is this area that has seen most of the acquisition activity in recent weeks, as bigger ad players try to streamline the online advertising process. For example, Avenue A/Razorfish bought ad space on a total of 863 individual sites last year for its clients, which include Kraft Foods Inc., Walt Disney Co. and Nike Inc. To line up all that space, Avenue A/Razorfish used firms that deal with hundreds or thousands of Web sites.
2. Ad Networks: Ad networks, buy space from sites and resell it to advertisers at a premium. Among the major ad networks are Advertising.com, acquired in 2004 by Time Warner Inc.’s AOL, and 24/7 Real Media.
3. Ad-serving firms: Ad-serving firms are technology companies that get the ads from the advertiser to the Web sites that the ad network firms have lined up. The top two ad-serving companies are DoubleClick and Atlas, another unit of aQuantive. Ad-serving companies save the digital information that creates an online ad on a computer server and then deliver that data to the sites where marketers bought advertising space. This lets ad agencies change the contents of an online ad or where it runs on a site by switching that digital information on the computer server instead of communicating with each of the hundreds of sites where an ad might appear.

Some ad-serving companies also have ad-network arms. DoubleClick, for example, provides both these services for advertisers and Web sites.

Based on the action in the space you can see where the online ad market is going towards…while paid search is the cash cow, Branding seems to be future opportunity…Looking at the numbers there is huge room for growth.

(Numbers etc. borrowed heavily from the WSJ piece).

Also available on RWW…

Since we are talking about open source, a definition of the subject from Wikipedia is in order:

“Open source is a set of principles and practices that promote access to the production and design process for various goods, products, resources and technical conclusions or advice. The term is most commonly applied to the source code of software that is made available to the general public with relaxed or non-existent intellectual property restrictions. This allows users to create user-generated software content through incremental individual effort or through collaboration.”

In the area of computers and Internet, open source movement is almost as old as computers themselves. In the beginning there was Multics, Unix, BSD, Minix etc. Than came Richard Stallman’s GPL, GNU and FSF. That was followed by Linux, Apache and many more projects. Over time open source movement has begun extending to things beyond software and technology to include media (video, pics and blogs etc.), creative content (creative commons) and communities.

Since open source movement affects our lives in more and more ways, let’s take a look at how the open source model is interacting with our market driven economic system.

Open Source Business Models

The heightened level of interest in open source model has lead companies to start looking for ways to add value to the process of open source development and distribution in order to make money from it. Some of the models/approaches that have emerged are:

• Develop the product and open it up to the community: The main goals for the businesses here are two fold:
  • Generate marketing buzz
  • Leverage the skills/people in the community to enhance the product.

Businesses make money by selling add on software modules or services to customers using the open source technology. Some of the examples of this model are Eclipse (IBM), Netscape, Linux, and recently Solaris (Sun) etc. While this model sounds attractive as a way to reduce development costs, there are plenty of other expenses for the businesses. Businesses need to create and participate in boards (Sometime controlled by the business, sometimes not) to chart a sensible product direction, to manage licensing issues and to put together a well tested base distribution bundle. Working on a board staffed with community members and sometimes even competitors can be an expensive and time consuming process.

• Take an Open Source product and provide support and services to enterprises: There are a number of companies like MySQL, Zmanda, RedHat etc. that provide such services. The business model is all about building up the volume and driving up the percentage of paying customers (typically less than 2% of the customers pay) for customer support or other services.

• Provide open source platforms: There are a number of sites/projects like sourceforge.net, google code and even YouTube or FaceBook that provide platforms for open source like collaboration. The business model typically is to provide the basic services for free and make money via ads by driving the page views.

The value of the open source is pretty clear to customers as they get the product and services they want without having to pay for the underlying product…But who else is extracting the rents in open source related economic activity? Let’s look at the value accruing to three important stakeholders – Businesses, Customers and Contributors.

Value to open source businesses

Some have argued that businesses are capturing the lion share of the value of open source at the expense of contributors and customers. This point of view is expressed by Dirk Riehle (leads the open source research group at SAP Research) in his recent paper on the topic. Dirk argues that businesses derive the maximum benefit because:

• Customers want a deployed solution, so service companies (like IBM) that use the open source software, just make up for the free open source software by increasing the price of the service. This increase directly goes to their bottom line.
• Businesses benefit as employers, because larger talent pool due to non-proprietary nature of open source, enables businesses to have a stronger negotiating position compared to the individual developers.

Besides the obvious conflict on interests (Dirk works for SAP which isn’t big on open source and competes with IBM which is), Dirk makes the first point without pointing to any data. I find it hard to believe that customers don’t see a lowered bill when open source software is used compared to proprietary software.

For his point #2, Dirk again, provides no facts but makes a general assertion. I believe that the people who contribute to open source are self motivated people who enjoy programming and as such get a higher salary compared to people who do not participate in open source.

Also from the open source businesses point of view, if we consider the costs associated with managing, engaging and participating with the community, I am not sure the open source businesses will come out with lower costs, compared to non-open source businesses.

Overall it seems to me that open source businesses have significant costs and barriers to profitability and are certainly not capturing the majority of value in open source transactions.

Value to Customers

Customers using open source benefit a great deal.

• Free software makes it easy to get started.
• Using open source enables customers to avoid the dreaded vendor lock-in. So if customers are using open source they are able to change providers if they are not particularly happy with the service provided by the vendor. Open source provides them with huge leverage with service providers.
• The customers benefit as they have a larger talent pool to hire from and they don’t have to pay proprietary vendors for all sorts of “certifications” etc.

Overall the customers come out well ahead by using open source technology. In fact, were it not for the LAMP (Linux, Apache, MySQL and Php, Python, Perl etc.) stack, startups costs would have been a lot higher then they are today and we would not be seeing the amount of innovation we are seeing in the field of Internet and Technology.

Value to Contributors

Contributors to open source also benefit from participating:

• It used to be the case that contributors did not get paid for their contributions and had to work on their own time, but things are changing. With the popularity of the open source projects, more companies are paying contributors to support the community or are even contributing proprietary modules to the community. This provides direct incentives to contributors to work with the community.
• Open source participation is a great way to establish creadibility of you are a programmer…Have you seen ads like these?“With your resume, please include some php and javascript code snippets or refer us to an open source project you’ve worked on.”
• Most good open source developers have an opportunity to become public voice of the project. This extended role for engineers not only means an ego boost but also translates to higher salaries etc.

Overall developers working on open source come out ahead by participating in the open source projects.

Conclusion

Open source movement has become a powerful value creator. In addition it has created an interesting and somewhat egalitarian wealth distribution mechanism, where on one hand it has made it hard for one stakeholder to extract inordinate rent, on the other hand it has created right incentives for a lot of people to participate and have a stake in its success. No wonder it is becoming a popular model for more and more businesses and social activities.

Fascinating piece in the post today, related to how scientists are finding evolutionary basis for human morality.

Pic via MrFarber on Flickr

Grafman and others are using brain imaging and psychological experiments to study whether the brain has a built-in moral compass. The results — many of them published just in recent months — are showing, unexpectedly, that many aspects of morality appear to be hard-wired in the brain, most likely the result of evolutionary processes that began in other species.

No one can say whether giraffes and lions experience moral qualms in the same way people do because no one has been inside a giraffe’s head, but it is known that animals can sacrifice their own interests: One experiment found that if each time a rat is given food, its neighbor receives an electric shock, the first rat will eventually forgo eating.

…

Joshua D. Greene, a Harvard neuroscientist and philosopher, said multiple experiments suggest that morality arises from basic brain activities. Morality, he said, is not a brain function elevated above our baser impulses. Greene said it is not “handed down” by philosophers and clergy, but “handed up,” an outgrowth of the brain’s basic propensities.

…

In one 2004 brain-imaging experiment, Greene asked volunteers to imagine that they were hiding in a cellar of a village as enemy soldiers came looking to kill all the inhabitants. If a baby was crying in the cellar, Greene asked, was it right to smother the child to keep the soldiers from discovering the cellar and killing everyone?

The reason people are slow to answer such an awful question, the study indicated, is that emotion-linked circuits automatically signaling that killing a baby is wrong clash with areas of the brain that involve cooler aspects of cognition. One brain region activated when people process such difficult choices is the inferior parietal lobe, which has been shown to be active in more impersonal decision-making. This part of the brain, in essence, was “arguing” with brain networks that reacted with visceral horror.

Such studies point to a pattern, Greene said, showing “competing forces that may have come online at different points in our evolutionary history. A basic emotional response is probably much older than the ability to evaluate costs and benefits.”

…

Why is it that people who are willing to help someone in front of them will ignore abstract pleas for help from those who are distant, such as a request for a charitable contribution that could save the life of a child overseas?

“We evolved in a world where people in trouble right in front of you existed, so our emotions were tuned to them, whereas we didn’t face the other kind of situation,” Greene said. “It is comforting to think your moral intuitions are reliable and you can trust them. But if my analysis is right, your intuitions are not trustworthy. Once you realize why you have the intuitions you have, it puts a burden on you” to think about morality differently.

I guess we (and other animals) are really social beings…It also means that its easy for us to empathize and interact with people in face to face settings…This really presents a dilemma for social media where the geographical or even chronological proximity is not required for most interactions…I am pretty sure our genes provide no direction on what to do there? What do you think?

Interesting article in the Times today (NYT guys have really gotten their act together and are producing some good content about social media of late) about the high price of creating free ads.

Pic via NYT

From an advertiser’s perspective, it sounds so easy: invite the public to create commercials for your brand, hold a contest to pick the best one and sit back while average Americans do the creative work.

In one of them, a teenage boy rubs ketchup over his face like acne cream, then puts pickles on his eyes. One contestant chugs ketchup straight from the bottle, while another brushes his teeth, washes his hair and shaves his face with Heinz’s product. Often the ketchup looks more like blood than a condiment.

Heinz has said it will pick five of the entries and show them on television, though it has not committed itself to a channel or a time slot. One winner will get $57,000. But so far it’s safe to say that none of the entries have quite the resonance of, say, the classic Carly Simon “Anticipation” ad where the ketchup creeps oh so slowly out of the bottle.

Consumer brand companies have been busy introducing campaigns like Heinz’s that rely on user-generated content, an approach that combines the populist appeal of reality television with the old-fashioned gimmick of a sweepstakes to select a new advertising jingle. Pepsi, Jeep, Dove and Sprint have all staged promotions of this sort, as has Doritos, which proudly publicized in February that the consumers who made one of its Super Bowl ad did so on a $12 budget.

But these companies have found that inviting consumers to create their advertising is often more stressful, costly and time-consuming than just rolling up their sleeves and doing the work themselves. Many entries are mediocre, if not downright bad, and sifting through them requires full-time attention. And even the most well-known brands often spend millions of dollars upfront to get the word out to consumers.

Some people, meanwhile, have been using the contests as an opportunity to scrawl digital graffiti on the sponsor and its brand. Rejected Heinz submissions have been showing up on YouTube anyway, and visitors to Heinz’s page on the site have written that the ketchup maker is clearly looking for “cheap labor” and that Heinz is “lazy” to ask consumers to do its marketing work.

“That’s kind of a popular misnomer that, somehow, it’s cheaper to do this,” said David Ciesinski, vice president for Heinz Ketchup. “On the contrary, it’s at least as expensive, if not more.”

I am not surprised that the Heinz Ketchup folks ended up not having a good experience with what they were trying to do. Their approach does not make any sense on so many different levels:

1. They are trying to take community content to put it on mass media outlet like TV. The content created by the community is not going to be polished or suitable for mass media. Its like taking square shaped, rough edged user generated content and trying to fit in in a round hole of mass media outlet. No wonder they are not happy…
2. Its kinda cynical approach to engaging the community to just do your Ads…if they were really interested in working with the community they should have empowered them more…and allowed them to have real influence in the direction of what they are doing. I am not sure what they are trying to achieve here.
3. If they are interested in really having a conversation with their user they should build up a process for interacting and really listening to them..it would also mean giving up some of the control…its really a tall order and not many companies are up for the challenge…

What do you think?

New York Times had an interesting piece a few days back about the advances in ad targeting and measurement technologies that are enabling companies to use the web effectively to build a brand.

Peter and Maria Hoey (via NYT)

THE Internet search engine is an indispensable tool of modern life and an advertising gold mine for Google, the favorite first stop on the Web.

But searching accounts for only about 5 percent of the time people spend online; the other 95 percent is spent on the wider Web, where a different advertising landscape looms. Instead of the short text ads that appear on a Google results page after a search, visitors often find display ads that are the Internet’s equivalents of glossy magazine ads or television commercials. These are typically the province of brand advertisers like Cadillac and Coke.

Until recently, however, it was impossible to tell whether these ads were in fact reaching their target audiences because no one had applied the computing tools and powerful mathematical analytics that were needed to link online display ads to specific markets. But that is changing, and a number of small companies are standing at the forefront of this transformation.

Indeed, many in the industry regard display advertising that can reach specific audiences as the next big online opportunity — the postsearch wave, the Internet ad market 2.0.

The result…lousy RPM (revenue per 100 impressions for the site owners that provide great branding opportunities) and a lot of viable content and sites go under because of lack of monetization…

“The promise is to be able to measure the reach and effectiveness of brand advertising as never before,” said Rich LeFurgy, a principal at Archer Advisors, a digital-advertising consultant. “If that happens, it will really accelerate the migration of brand advertisers online.”

The big Web portals like Yahoo, AOL and Microsoft are working on it, trying to tease out which display ads should be shown and to whom. Last month, when Google paid $3.1 billion for DoubleClick, which specializes in software for display ads and has close relationships with Web publishers and advertisers, it declared that display ads would be crucial to its future strategy.

But besides the giant portals, there are scores of small, innovative companies — typically venture-backed start-ups — that are behind the revolution on Madison Avenue.

Industry analysts estimate that there are about 200 such companies. Many call themselves ad networks, while others are referred to as ad exchanges or optimization services. The roster includes Revenue Science, Tacoda, Tribal Fusion, Rapt, AdECN and x+1. In one way or another, they are all trying to bring more effectiveness to the online display ad market.

…

The ideal, Mr. Gabriner said, is to advertise only to prime customers. “Imagine an environment where the company that makes dentures and denture products only advertises to people who don’t have teeth,” he said.

The most common technique for identifying an audience is called behavioral targeting, which tracks, analyzes and predicts online behavior based on where you (actually your browser software) have gone before on the Internet. The ad targeters cull vast quantities of Web-viewing behavior and other data, like the speed of your Internet connection, the time of day you visited a site, whether it was done from work or home and even associated ZIP codes.

These defined audience clusters consist of people who share characteristics based on their behavior on the Internet, not personal information like names, ages, home addresses or telephone numbers. So, for example, a person who recently visited sports and auto Web sites and read global warming articles on news sites would most likely turn out to be an 18- to 45-year-old male. An algorithm would then determine that he would be a good candidate for an ad about Toyota’s hybrid-electric Prius. Advertisers are willing to pay much higher rates to reach such screened audiences.

Most of these companies are working on using the available context to target the ads better and then measure their effectiveness…While there is a lot of work going on in the area of targeting the ads based on available information, not enough work is going on figuring out how to understand the user better…This is another area that is likely to be big and will benefit users, site owners, and the advertisers…One idea has been the user controlled attention data, that users can share with any site they go to, in order to provide their context to the sites…in return they get better ads and service…This is really an interesting and exciting area that bears watching out.

Check out this fascinating piece from NYT magazine by Clive Thompson about the new dynamics/business models in the entertainment industry…I have to warn you that it is kinda long but its really well written…Also be sure to look at this video about “Code Monkey”, which seems like an anthem for computer programmers everywhere…

(Pic via NYT as well)

The Hold Steady’s online audience has grown so huge that Kubler, like Jonathan Coulton, is struggling to bear the load. It is the central paradox of online networking: if you’re really good at it, your audience quickly grows so big that you can no longer network with them. The Internet makes fame more quickly achievable — and more quickly unmanageable.

…

To cope with the flood, the Hold Steady has programmed a software robot to automatically approve the 100-plus “friend” requests it receives on MySpace every day. Other artists I spoke to were testing out similar tricks, including automatic e-mail macros that generate instant “thank you very much” replies to fan messages. Virtually everyone bemoaned the relentless and often boring slog of keyboarding. It is, of course, precisely the sort of administrative toil that people join rock bands to avoid.

Things sure are a changing.