Internet Outsider

MSN Update: Prosperity Still Around Corner

Most people have finally given up on the idea that Microsoft will ever become an online contender, but for those who are still holding out hope, the first quarter's performance offers little encouragement.

• True, MSN's year-over-year revenue growth "accelerated," but the celebration is misplaced.  Growth accelerated from 5% to 10%.
• More importantly, advertising revenue also accelerated...from 21% Y/Y to 23%.  This respectable growth massively trailed Google's, but bested Yahoo!'s.  Unfortunately, this is more a comment on Yahoo than MSN.
• Advertising growth, moreover, is impossible to view without also taking into account the expense growth of 39% year-over year.  MSN grew advertising revenue by $85 milllion...and its costs by $234 million.  For every $1.00 of incremental revenue MSN generated, it spent $2.75.  That's not capital investment.  That's operating expenses.
• The growth in advertising revenue, moreover, came from display advertising on email, the home page, etc, not search.  So much for encouraging signs about AdCenter. 
• Then there's the bottom line.  Say what you will about Yahoo's glacial expansion-rate; at least it's making money.  Microsoft isn't--and won't.  In fact, after losing $205 million in Q1, it's on track to lose almost $1 billion this year.

For Microsoft, web prosperity will forever be just around the corner.

Microsoft: The Internet Brain Drain Continues...

Robert Scoble, recently of Microsoft, reports that Microsoft's talent drain is continuing.  In its efforts to defend itself against Google, let alone make up ground, this is exactly what the company cannot afford.  The revolving door in Microsoft's Internet business is preventing the company from developing and sticking with a consistent strategy and making an already major challenge--transitioning from leading one technology revolution to leading the next--downright insurmountable.

Scoble: I just got a press release that Tjeerd Hoek, director or user experience design for Microsoft Windows, is now executive creative director of software and hardware convergence at Frog Design. Tjeerd was well liked and well respected inside Microsoft. Microsoft is seemingly in the middle of a full-bore executive cleanout. I've seen tons of executives leave, particularly in the MSN/Live division that's struggling to compete with Google. Nearly every executive I knew inside that division is now gone.

Just a few days ago Mary Jo Foley reported that Dane Glasgow left, following Chris Payne. Mary Jo also has a report on Microsoft's financial results, which were pretty darn good overall (they better be, a new copy of Windows and Office shipped). The question now is "will the sales of those sustain over several quarters?" Microsoft's guideance says it will.

JJ:  Robert was a very high profile blogger for MSFT who left the firm a few months ago.

MSN: Anothe Search Exec Flees Sinking Ship

ZDnet: On April 24, Microsoft announced internally that Dane Glasgow, general manager for Live Search, is leaving the company to work for various nonprofits and spend more time with his family.  Glasgow was one of the handful of direct reports of Satya Nadella, Microsoft's newly appointed search chief, who is heading up Microsoft's combined search and ad platform unit. Glasgow helped Microsoft launch Windows Desktop Search and has been part of the team behind the first wave of Windows Live services. (Nadella replaced Chris Payne, the former head of search who left Microsoft at the end of March.) ….In March, Blake Irving, the Corporate VP in charge of the Windows Live platform, announced his plans to leave Microsoft, effective this summer. Payne announced his resignation from Microsoft shortly after Irving made his announcement.

JJ: If MSN Ad Center is really technically better than GOOG Adwords like many people say, why is it failing to gain traction and why is the team bailing?

HB: I've said it before, and I'll say it again: The web war is over, and Microsoft lost.

Click Fraud Getting Worse, Especially on Content Networks

Click Forensics, a Texas-based company that tracks click fraud using detailed campaign data from more than 3,500 marketers, reported that industry-wide click fraud increased modestly in Q1 to its highest level ever: about 15% of all clicks, versus 14% in Q4 2006.

More ominously, click fraud on "content networks"--the third-party advertising solutions that support an ecosystem of thousands of small content companies--increased a more significant 3 points, to 22%, from 19% in Q4.  This trend is dangerous for small content providers in addition to search engines.  A continuation of this trend will soon result in more than a quarter of all content-network clicks being considered fraudulent, a level that could begin to cut significantly into the revenue of smaller content providers.

Also significant: Fraud on high-priced keywords--those over $2 a click--rose to 22% from 21% in Q4, confirming the theory that higher priced keywords are more susceptible to fraud than average- and low-priced keywords.

From the release:

“It appears that click fraud perpetrators are becoming more sophisticated even as search providers step up their efforts to fight click fraud,” said Tom Cuthbert, president and CEO of Click Forensics, Inc. “Click fraud seems to be following a similar path as other online fraud schemes such as spam and phishing - the problem is growing as fraudsters fine tune their methods.”

Google Swallows DoubleClick for a Mere $3B

What's $3.1 billion between friends?  Or, put differently, what's it worth to fix your display-advertising problem, corner the market for the "advertising operating system," and deliver a hammer-blow to an already prostrate Seattle-based competitor?  $3.1 billion?  Sure.  Only a few quarters of free cash flow.

So now Google controls a vast share of the market for graphical online advertising, too.  And has yet another display on its world-domination dashboard about who's doing what where.  For those with an eye on the really-long term, it's hard to see how this isn't good news.

For those with an eye on the near-term stock price, meanwhile, it's probably bad news: Lower margins, a big management challenge, a significant price tag, an admission on the largest scale to date that it sometimes makes sense to buy instead of build (no shame in that--just lower returns on capital), and so on.  But as Google made abundantly clear in its IPO prospectus, management (sensibly) isn't focused on the short term.

One Way for Microsoft to Kill Google

Okay, not kill Google, and, really, barely even scratch it, but at least a way to make publishers happy and claw back some market share.

As Douglas McIntyre points out on www.24Wallst.com, one flaw (for publishers) in Google's advertising programs is that publishers receive no compensation for displaying ads that aren't clicked on--even when those ads are towering skyscrapers that have immediate (and unavoidable) branding impact.  The advertiser is certainly gaining something from such ads (brand exposure, reach), and Google is certainly gaining something (power), but the publisher ain't getting jack.

So it's time one of the big ad networks started compensating publishers on a CPM basis in addition to a CPC basis.  The per-view payment obviously shouldn't be as much as a per-click payment, but it should be something.  Newspapers, after all, get paid huge bucks for running un-clickable ads, many of which are never even viewed (because the whole section is tossed in the trash). 

This is where Microsoft has an opportunity.  Inasmuch as it is already trying to build a branding campaign around its benefits to publishers ("Google wants to steal your stuff; we want to help"), it should create a CPM based network and start paying publishers for delivering eyeballs in addition to clicks.

UK Online Ads Pass Newspapers; U.S. Online Ad Spending to Triple?

According to IAB, online advertising spending in the UK in 2006 exceeded newspaper advertising spending.  This amazing fact received less attention in the U.S. than it should have.

One of the big mysteries of the past few years, for those who follow U.S. media, is how and why U.S. newspapers have been able to maintain as much share of the advertising market as they have.  Yes, business sucks for newspapers, but it doesn't suck as much as it should when one considers that the vast majority of the product is printed on wood pulp, shipped around the country in gas-guzzling trucks, and then tossed into recycling bins before it is even glanced at. 

According to Morgan Stanley figures for 2005, U.S. newspapers still generate about $49 billion in advertising revenue (including classifieds).  This compares to about $16 billion last year for Internet, $45 billion for broadcast television, and another $19 billion for cable TV.

Unless there is something structurally different about the UK market--please weigh in on this if you know--the UK statistic suggests that 1) the US online advertising market still has massive growth ahead of it, and 2) U.S. newspapers have not yet begun to feel the pain. 

Two scenarios jump to mind:  1) Online advertising triples over the next 5-10 years, to $50 billion, and/or 2) Online advertising doubles and newspapers advertising gets cut in half.  And then, of course, there's 3) Online advertising triples AND newspaper advertising gets cut in half.

UPDATE: Paul Durham weighs in:

There is something very different about the UK newspaper market - the number and importance of national newspapers. The IAB data shows internet advertising overtaking NATIONAL newspaper advertising. Regional newspapers is a separate category, and took £2.8 billion of ad revenue. So the internet still lags well behind total newspaper advertising in the UK.

Posted by: Paul Durman | April 03, 2007 at 11:15 AM

So, ignore some of what I said above.

YouTube - Big Media Video: Revenue Splits and the Real Stumbling Block

In Sunday's New York Times, Richard Siklos provided some detail on the contemplated revenue splits for BIGMEDIAVIDEO.COM (the NBC/News Corp. theoretical consortium) and YouTube and its content partners.  He also suggested (as the Times has previously) that the real stumbling block in the Big Media-YouTube negotiations is not money but control: The Big Media folks can't live with the idea that someone else (GooTube) will sell advertising against their content.

According to Siklos, the revenue splits between BIGMEDIAVIDEO.COM and its distribution partners will be 90%-to-BIGMEDIAVIDEO and 10% to the distribution partner.  This is interesting, but it leaves out the most important split, at least w/r/t the YouTube-Big Media negotiations: The split between BIGMEDIAVIDEO and the specific Content Owner.  Will each partner in the consortium contribute the same amount of video?  Will they own the same amount of equity?  Will the revenue splits be the same for all BIGMEDIAVIDEO content providers?  If not, the consortium is especially doomed to failure.  If FOX's videos are more popular than NBC's, why will Fox sit by and allow its competitor to benefit at its expense?  (Sorry, but this BIGMEDIAVIDEO thing is DOA).

Siklos also reports that the split between YouTube and its content owners is 30%-to-YouTube and 70%-to-the-content-owner.  This seems reasonable, especially if YouTube is shouldering the costs of selling and serving the advertising (or perhaps the split is after overhead).  If this split were the only hang-up, every major media would probably rush to do a deal with YouTube. 

According to Siklos, however, the larger issue is control: Big Media folks revere their relationships with advertisers, and they don't want someone (Google) getting between them.  In my opinion, if Big Media wants to survive in this new world, this is something they're going to have to get over.

So...YouTube's Toast?

Some traditional content companies finally got their act together and announced a communal video distribution site.  So is YouTube toast? 

No.

How is it not toast?  Let us count the ways.

First, there's the smart point that Fortune's Adam Lashinsky makes in his piece today: Hobbling YouTube would be a tough enough job for an as-yet-to-be-named-built-or-launched site run by ONE big media company.  So imagine how hard it will be when each of SIX big media companies is fiercely looking after its own interests, pointing fingers, spreading blame, demanding changes, etc., before the site even gets up and running. 

Second, big media video content is NOT the only kind of video that Internet users want.  On the contrary, a recent review of Vidmeter, YouTube's most popular channels, and compete.com's analysis of what happened to YouTube's traffic when the 100,000 Viacom videos were deleted (up 14% in two weeks, per the NY Times), suggests that Jon Stewart et al clips comprise a far smaller percentage of total online video content than most people think.

Third, online video will NOT be a winner-take-all game.  Even if BIGMEDIAVIDEO.com actually gets up and running--a real "if," in my opinion--and even if YouTube chooses not to license or otherwise distribute the content, there will be plenty of room for multiple players.  The experience and know-how that YouTube has developed over the past two years, moreover, will continue to give the company a major operating advantage, especially at scale. 

Fourth, unless BIGMEDIAVIDEO.com 1) maintains a chokehold on ALL professionally produced content--something that sounds next to impossible, given that many companies have yet to join the consortium--and 2) builds a powerful consumer brand, YouTube will still be the first stop for many Internet users interested in video clips.  Although Viacom probably assumes otherwise, many Jon Stewart fans probably have no idea what company produces his show (and, therefore, don't think to look on comedycentral.com).  By now, however, most consumers think that youtube=online video, the same way that google=search, so youtube may always be the first stop for many of them.  And once it decides to aggregate links to all online video, there is nothing to stop YouTube from employing--and making a lot of money off of--the same model that has made Google the most powerful media company in the world: sponsored search.

Prediction: Google to Buy Spot Runner

Spot Runner CEO Nick Grouf presented today at OMMA Hollywood.  Spot Runner provides a simple, quick way for local businesses and national corporations with local offices to create, buy, and place highly targeted local TV advertising.  If Google's M&A team is not already driving down to LA with truckloads of money to buy the company, they should.  And if they don't, Microsoft or Yahoo should.

Accordingt to Nick, Spot Runner reduces the cost of creating a decent TV ad from $500,000 to $500 ($499 to be precise).  It reduces the time necessary to plan and buy a TV campaign from 6 weeks-12 months to 24 hours.  It allows thousands of local businesses and franchises that would never have been able to employ TV advertising in the old media world to do so--and target the campaigns by zip code. 

UPDATE

Two readers argue (see comments) that what Spot Runner is offering is nothing new--that cheap creative has been available since the Dark Ages, that you can target by zip code, etc.  The impression I got from the presentation was that Spot Runner seriously streamlined the process (and reduced costs).  Any Spot Runner customers out there care to weigh in?

UPDATE 2

One reasonably happy Spot Runner customer weighs in (see comments).  Any others out there?