Shahar Solomianik

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Archive for February 2009

CPA Needs to be the Next Revolution in Online Advertising

with 119 comments

Hard Times

The economy is bad. The advertising market is slowing and ad rates are deteriorating . It seems like hard times are upon us. Are they? Maybe. Or maybe it is simply time for innovation.

As far as the online advertising market goes, we must remember that though the market has its own organic growth – which may have slowed down – online advertising is still a part of the whole advertising market. As such, it can generate growth simply by gaining market share over other advertising platforms.

The short nature of human memory makes us forget that online advertising’s ability to gain market share is exactly what drove the industry to its current size in the first place. Online Advertising gained market share over other advertising methods during bad economic times simply due to its ability to demonstrate better measurement and performance. The current slowdown, in my opinion, is a sign of a lack of innovation. This lack of innovation is what stops Online Advertising from growing even further.

Hey, maybe we should embrace the current crisis as a motivator for innovation. What kind of innovation? CPA, if you ask me.  And here’s why:

CPM

Let’s begin with a look at the history of online advertising. CPM was the first and most simple pricing model for online advertising. It was a copycat of the traditional offline advertising CPM model, common in TV, printed media, billboards et al. All offline advertising methods price their inventory according to a quality variable (length of the TV ad, square inches of the newspaper ad, location of the billboard) multiplied by the anticipated number of eyeballs it will reach.

And so it was the same thing on the web – only that the web had two advantages over traditional offline CPM. Eyeballs were measured in a more precise way – looking at webserver logs to count an advertisment’s exposures  is much more accurate than counting the number of cars going through an intersection at the rush time to assume the daily averages for billboard advertising.

The second advantage online CPM introduced was accurate counting for clicks. For the first time, advertisers could measure engagement through feedback from the target audience. On offline media this kind of data was only achievable using expensive market surveys with questionable results.

Online CPM was one thing that drove the online advertising market to grow. Advertisers eventually realized that they should spend their CPM dollars where they have better accuracy and engagement measurement.

But that wasn’t all.

CPC

The real thing that pushed the market forward was the development of performance advertising. Introduced by Overture in 1998 and perfected by Google a few years later, CPC was something completely different.

For the first time, advertisers could pay just for engagement. Even better, for the first time, advertisers shared the burden of goal achievement with the publisher. Gone were the days of a publisher just allocating the ad space and then forgetting about it. With CPC, publishers were motivated to increase their audience engagement for advertisers. They could change the locations of ads, their appearances, help increase their relevancy by providing keywords and so on. The more the publishers made an effort, the more they earned. A unique cooperation model was born.

Very quickly advertisers realized that CPC helps them achieve their goals. Whether it was sales, sign ups or leads, CPC took them one step closer to success. They could lower their investment in converting views to clicks – that was left for the motivated publishers – and instead concentrate on converting clicks to goals. Performance advertising was born.

More than CPM, CPC significantly drove advertisers to allocate a portion of their budget to online advertising. Additionally, Google’s method enabled small advertisers to join the game. With TV, you couldn’t even think about advertising if you had less than few thousand dollars. On Google, however, you could advertise your product with as little as 5 cents.

Of course CPC has its own problems. First and foremost is click fraud. Second, though it gets advertisers closer to their goals and helps them spend more effectively, it doesn’t bring them directly to achieving their goals the way CPA does.

CPA

CPA dates back to the same time as CPM, 1994. Thanks to Amazon, CPA gained a reputation as an essential part of the company’s growth.

CPA is the best pricing model for advertisers. It provides certainty regarding the future ROI of their whole campaign. It lessens the number of variables that are part of the calculations when determining ROI. When advertisers buy advertising using CPA, they know exactly how what they will recieve for each dollar spent. When they set their CPA rates, they are actually determining their own margins – as simple as that.

CPA is Not Scalable

However, Google and its CPC concept has taken the lead.  Not because it was a more effective method,  but because it was a scalable method. Compared to Google’s scalable CPC solution, CPA implementation was poor. Why?

The same advantage that CPA holds for advertisers turns out to be a disadvantage for publishers. While advertisers are spared from converting views to clicks to goals, the burden falls on the publishers. And as it turns out, the eCPM that publishers generate from CPA advertising is usually lower than that which is generated by CPM or CPC, hence its narrow adoption – only 7% of the market.

However, when CPA is used effectively, it generates a much higher eCPM than CPC and CPM because it is more effective by nature. When advertisers save $X thanks to CPA, a portion of this $X is passed on to the publisher’s eCPM. In fact, when used effectively CPA is such a powerful revenue generator that an entire mini industry of CPC to CPA arbitraging is prospering.

Yet, what prevents CPA from becoming a commodity for publishers is its scalability. Those who fully utilize it are only small publishers; the ones who can manually optimize their CPA campaigns, a tedious process. Optimizing Google AdSense CPC isn’t such a hassle – Google provides the contextual elements, and publishers can scale location and appearance easily. Scaling CPA in a way that both saves the manual optimization from the publishers and generates a high eCPM is not yet available.

CPA is the Future

We must develop an innovative way to scale CPA. Imagine the possibilities if such a tool existed. If publishers adopt it widely, it could drive more advertisers to use the CPA model. Consequentially, the whole market will act more effectively. Eventually, this will lead to advertisers re-allocating their offline budgets to online, and our industry will be saved!

Is there currently any innovation taking this route? Not really. Google experiments in it, and we could see something robust from them in the future. CPA networks don’t seem to be too innovative, and while there are few startups tackling this model, none of them seem to be revolutionary enough.

However, we are only at the start of tough times. The longer this downturn lasts, the better the chances are to see innovation, especially when the entrepreneurs realize that whoever succeeds to innovate in this market, might as well be the next Google.

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Written by Isaac Trond

February 24, 2009 at 1:24 pm

Posted in Web

Tagged with ,

Twitter Cybersquatting?

with 13 comments

Lately, the revenue generating intentions of Twitter are becoming clearer. Twitter already understands that businesses see a great value in operating a twitter account, and they tend to search for their revenue there. It sounds like a great idea.

However, a phenomenom that has been quite negligible up until now has become significant: cybersquatting over twitter. The value of having a branded Twitter account is so clear to businesses and Twitter alike; this value is also clear to opportunists who are squatting the twitter account names from big companies, probably with future monetization ideas in mind.

Try it for yourself, it’s fun! Just think of a big corporation and see if there is already a twitter account with its name. While some businesses seem to have been fast enough to secure their Twitter account (@google, @facebook), some slower reacting corporations have been squatted already.  It’s hard to believe @microsoft, @apple, @chevrolet and @audi are really representatives from the corresponding companies.

I wonder when Twitter will start paying attention to this issue and how they intend to solve it. Any ideas?

Written by Isaac Trond

February 18, 2009 at 10:46 am

Posted in Web

Tagged with ,

Can Zemanta Generate Revenue?

with 149 comments

Zemanta is getting a lot of attention lately. And why not? This fascinating blog/e-mail enrichment tool adds new and surprising features on an almost daily basis. But I’ll leave the discussion about their features and products to others right now. What interests me is the business model behind Zemanta.

Exit Strategy

I am not sure what the initial goal of Zemanta was when they were founded, but the moment they accepted VC funding, they had to adopt the idea of an exit on the horizon. Making an “exit” is not necessarily a function of the company’s ability to generate revenue or show a sustainable business model. Sometimes, the acquiring company simply sees a great value in the startup that is not expressed through its financial reports. Google, for example, acquired Youtube before it showed any significant income. Youtube brought something more relevant to them – a significant search volume.

Is Zemanta headed for such an exit? I don’t think so. I see the great value in Zemanta, but at this time I can’t see any synergy between Zemanta and a larger corporation that is already monetizing in the field where Zemanta is currently operating.

Moreover, Zemanta exposed a for-pay service when they introduced their public API. Make more than 10,000 daily API calls, and you are now a paying customer. A few days ago, they exposed a second for-pay product – a per-site installation for a subscription-based fee.

With all this in mind, we can assume that Zemanta does have plans to start generating revenue, and prove their concept with some green lines in their financial reports. But are their current offerings sufficient for providing those green lines? I am not so sure. Let me explain why:

Possible Revenue Streams

There are three type of actors in the Zemanta show:

  • the bloggers/writers
  • the service providers that operate the blogging/writing platforms
  • and the content consumers.

Each one is a candidate to become a revenue stream for Zemanta.

Bloggers/Writers

Zemanta hasn’t yet attempted to monetize their bloggers. But they did not completely close the door to this concept either. Download their browser extension and you are asked to agree to this:

“Our basic service is free, and we offer paid upgrades for advanced features such as customization and guaranteed service levels.”

However, even if they do try to monetize this front at some point in time, they need to have a huge user base for this monetization effort to show significant results. They wouldn’t charge bloggers for more than $5.00/month – would they? and for so little, they need 200,000 paying customers in order to make $1M/month. Assume a generous conversion rate of 1% from free user to a paying one, and Zemanta needs 20M registered users to be successful if they choose this path.

Feedburner jumps to my head now (same audience: bloggers; and same VC invloved): their efforts to monetize their user base by providing for-pay added-value services has failed. Google acquired them not for their paying clients – rather for their feed advertising network. Their “Pro” program’s revenue had probably been such negligible that when Google acquired Feedburner it opened up the “Pro” plan to anyone for free…

Service Providers

Most chances are that Zemanta will keep it’s service for bloggers/writers free for good, and maybe this is why they started their monetization efforts on the service providers front.

At first glance, their chances in this front seem much better. Service providers tend to be willing to pay for service if it is business wise: Let the service users use Zemanta, have them producing content of better quality, and have this translated into better revenue. I can understand that.

However, take any of the two payment scheme Zemanta offers, do some calculations and you still won’t understand how they are going to make some serious money.

Their SaaS offering values their API at a $0.66 – $4.00 per 1,000 calls. Even if they charge at the higher end of their scale, they need to be serving 250M API calls in order to make $1M. Where will they get those numbers from?

WordPress.com reports about 4M monthly posts. Add up all the posts from all other leading blogging platforms and you’ll get to how much? several tenths of millions per month maximum. Only if you add some 200M emails you may start be nearing the goal. But is this feasible? They need to be converting so many huge service providers for that to happen. This sounds far fetched.

Same goes for their second offering of $2,500/month per site installation. Where are they intending to find 400 paying service providers to pay this price, when their SaaS is so better priced?

The Consumer End

And that brings us to the last possible income stream – the content consumers. Zemanta is not showing any intention here yet, but I think this is where they are headed. Simply because charging their bloggers/writers or service providers can never work for them.

Now, I don’t claim that they will charge content consumers – not at all. That would be ridiculous. But they will need to use the content consuming point to make significant revenues only because this is where the numbers will be big enough. Think about it – each post that utilized a single Zemanta API call can be viewed by several to thousands of readers. An email that is written once with the help of a Zemanta feature can be sent to a lot of people and then be forwarded on, hence being read tenths, hundreds or thousands of times.

In the point of content consuming, numbers get a magnitude of order higher. Here Zemanta can start talking billions. And when you have billions of events, a small transaction fee can be multiplied to generate significant income. How? I don’t know. An advertising network based on Zemanta’s contextual abilities and huge network of publishers? Semi-organic paid link inclusions offered by Zemanta to the bloggers, maybe with a revenue share scheme? an innovative type of another commercial inclusions in blog posts and emails that no one else can yet think about other then Zemanta?

We can only guess the answer – or wait until time (or Zemanta) will tell.

Written by Isaac Trond

February 11, 2009 at 3:00 pm

Posted in Web

Tagged with ,

So What's Outbrain's Business Model?

with 234 comments

Recently I wrote about two companies, Weebly and Widgetbox, that launched their for-pay services after they had run only free services for some time. I believe that was each company’s first public appearance with a formal revenue generation model.

Whether a sign of times or not, it is interesting to examine a company’s business model, especially when that company’s initial launch was as a free service. I think we can expect more of these launches to come shortly. There is one in particular that I am waiting for with a great deal of curiosity: the public release of Outbrain’s business model.

I first heard about Outbrain a little less than two years ago when LGILab announced that they had invested in Outbrain. Overwhelmed by the idea that around a million dollars could be invested in what then looked like a silly widget, it was easy for me to miss this line from the announcement post:

…a service to deliver personal content recommendation with a secret but really innovative business model… But this will be more powerful than that and the secret-for-now business model is really smart.

I didn’t really see the value in it back then. Ok, so I am a blogger and I can put this rating widget that looks sooo web1.0 on my blog. Big deal. What’s next? Another widget? Is this like a JS-KIT competitor?

Then I forgot about Outbrain for a while, although its widget started popping up on many blogs that I read regularly. Great strategic marketing team, that’s for sure. Then, Outbrain received a second injection of funds, this time five million dollars, and a bit more of the service’s value was revealed.

Any time you rate a blog post using Outbrain, it recommends relevant links, whether in the blog you are reading or on other blogs that embed their widget. There is something in it not only for the publishers, but also for the content consumers. Now Outbrain started to sound better, and I began to see the “win win” model.

Not only will publishers get feedback, but links to their post will also appear on other blogs and posts. Content consumers, on the other hand, will have a chance to make their opinion count, and they will get other relevant content delivered to them because Outbrain learns what they like and dislike.

They’ve found a way to satisfy both publishers and consumers. And – the byproduct creates a recommendation engine. That’s nice.

Still, how they intend to make money?

I had several ideas. The most obvious one was ads embedded within the widget. After all, one of Outbrain’s founders is Yaron Galay, who recently sold Quigo to AOL. He must know something about advertising. However, this doesn’t seem likely. Moreover, they state on their site:

No marketing on your blog!
We don’t stick our logo or any ‘powered by Outbrain’ stuff through the widget. We are a guest on your blog and don’t intend to use it for our marketing purposes.

Another revenue model could be that they expand their content rating system into a product rating one. Then they can start making CPA e-commerce money. This comes to mind considering that another Outbrain founder – Ori Lahav – has a few years with Shopping.com on his resume. But this model seems too far fetched. They would have initially started with this method if that was their initial intention, right?

So what else can it be? I think it will be one of two models:

First, they can charge for inclusions in their relevant content box that is exposed to millions of users daily, much like Stumbleupon does. (Yes, not many people are aware of the fact that you can “buy” category-based stumbles. How else did you think Stumbleupon makes their money?).

Or perhaps they can try to somehow monetize their growing database of consumer preferences. After all, every time you rate a post, Outbrain collects another tiny bit of information about you, which could be used later to identify your preferences in a commercially effective way. I think this falls under the behavioral targeting definition. Exelate does something similar.

Like I said, these are just my predictions. Time will tell what Outbrain is really all about.

Written by Isaac Trond

February 3, 2009 at 1:34 pm

Posted in Web

Tagged with ,

So What’s Outbrain’s Business Model?

with 51 comments

Recently I wrote about two companies, Weebly and Widgetbox, that launched their for-pay services after they had run only free services for some time. I believe that was each company’s first public appearance with a formal revenue generation model.

Whether a sign of times or not, it is interesting to examine a company’s business model, especially when that company’s initial launch was as a free service. I think we can expect more of these launches to come shortly. There is one in particular that I am waiting for with a great deal of curiosity: the public release of Outbrain’s business model.

I first heard about Outbrain a little less than two years ago when LGILab announced that they had invested in Outbrain. Overwhelmed by the idea that around a million dollars could be invested in what then looked like a silly widget, it was easy for me to miss this line from the announcement post:

…a service to deliver personal content recommendation with a secret but really innovative business model… But this will be more powerful than that and the secret-for-now business model is really smart.

I didn’t really see the value in it back then. Ok, so I am a blogger and I can put this rating widget that looks sooo web1.0 on my blog. Big deal. What’s next? Another widget? Is this like a JS-KIT competitor?

Then I forgot about Outbrain for a while, although its widget started popping up on many blogs that I read regularly. Great strategic marketing team, that’s for sure. Then, Outbrain received a second injection of funds, this time five million dollars, and a bit more of the service’s value was revealed.

Any time you rate a blog post using Outbrain, it recommends relevant links, whether in the blog you are reading or on other blogs that embed their widget. There is something in it not only for the publishers, but also for the content consumers. Now Outbrain started to sound better, and I began to see the “win win” model.

Not only will publishers get feedback, but links to their post will also appear on other blogs and posts. Content consumers, on the other hand, will have a chance to make their opinion count, and they will get other relevant content delivered to them because Outbrain learns what they like and dislike.

They’ve found a way to satisfy both publishers and consumers. And – the byproduct creates a recommendation engine. That’s nice.

Still, how they intend to make money?

I had several ideas. The most obvious one was ads embedded within the widget. After all, one of Outbrain’s founders is Yaron Galay, who recently sold Quigo to AOL. He must know something about advertising. However, this doesn’t seem likely. Moreover, they state on their site:

No marketing on your blog!
We don’t stick our logo or any ‘powered by Outbrain’ stuff through the widget. We are a guest on your blog and don’t intend to use it for our marketing purposes.

Another revenue model could be that they expand their content rating system into a product rating one. Then they can start making CPA e-commerce money. This comes to mind considering that another Outbrain founder – Ori Lahav – has a few years with Shopping.com on his resume. But this model seems too far fetched. They would have initially started with this method if that was their initial intention, right?

So what else can it be? I think it will be one of two models:

First, they can charge for inclusions in their relevant content box that is exposed to millions of users daily, much like Stumbleupon does. (Yes, not many people are aware of the fact that you can “buy” category-based stumbles. How else did you think Stumbleupon makes their money?).

Or perhaps they can try to somehow monetize their growing database of consumer preferences. After all, every time you rate a post, Outbrain collects another tiny bit of information about you, which could be used later to identify your preferences in a commercially effective way. I think this falls under the behavioral targeting definition. Exelate does something similar.

Like I said, these are just my predictions. Time will tell what Outbrain is really all about.

Written by Isaac Trond

February 3, 2009 at 1:34 pm

Posted in Web

Tagged with ,