In the world of online media marketing, 2007 will be remembered as a quantum evolution in "behavioral targeting" technology. In April, Google swallowed up DoubleClick for $3.1 billion, followed in May by Microsoft's $6 billion purchase of aQuantive and Yahoo's "me too" buy of Right Media for $680 million (yes million). Although these major players had been engaged in BT since at least 2004, the marriage of a search platform with the largest banner ad serving network for publishers has blurred the line between service provider and competitor. The major online players appear to be declaring a head on war with the old school Madison Avenue companies, although WPP appears to be with the curve following their acquisition of 24/7 RealMedia in May. As the next evolution of the internet gets underway, the concept of "Long tail theory" is all of a sudden a part of every ad executive's vocabulary.
The recent spate of acquisitions by the four horsemen of AOL, Google, Yahoo! And Microsoft (a.k.a. G.A.Y.M.) further validates the convergence of keyword driven ad relevance with real-time anonymous collection and tracking of consumer behavior. In Google's case for example, their acquisition of DoubleClick Media, which owns the massive online affiliate marketing network Performics, solidified their market share in the high 70% to low 80% range of online search. Furthermore and perhaps much more significant, it brought Google full circle in terms of profiling the behavior of consumers from the moment of search until they close their browser. Albeit this is an anonymous level of tracking, the implications are profound in many ways but for the sake of this article, I will focus only on the economic implications for advertisers and publishers.
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Business Models on the Web
Business models are perhaps the most discussed and least understood aspect of the web. There is so much talk about how the web changes traditional business models. But there is little clear-cut evidence of exactly what this means.
In the most basic sense, a business model is the method of doing business by which a company can sustain itself -- that is, generate revenue. The business model spells-out how a company makes money by specifying where it is positioned in the value chain.
Some models are quite simple. A company produces a good or service and sells it to customers. If all goes well, the revenues from sales exceed the cost of operation and the company realizes a profit. Other models can be more intricately woven. Broadcasting is a good example. Radio and later television programming has been broadcasted over the airwaves free to anyone with a receiver for much of the past century. The broadcaster is part of a complex network of distributors, content creators, advertisers (and their agencies), and listeners or viewers. Who makes money and how much is not always clear at the outset. The bottom line depends on many competing factors.
The Venture Capital Squeeze
In the next few years, venture capital funds will find themselves squeezed from four directions. They're already stuck with a seller's market, because of the huge amounts they raised at the end of the Bubble and still haven't invested. This by itself is not the end of the world. In fact, it's just a more extreme version of the norm in the VC business: too much money chasing too few deals.
Unfortunately, those few deals now want less and less money, because it's getting so cheap to start a startup. The four causes: open source, which makes software free; Moore's law, which makes hardware geometrically closer to free; the Web, which makes promotion free if you're good; and better languages, which make development a lot cheaper.
When we started our startup in 1995, the first three were our biggest expenses. We had to pay $5000 for the Netscape Commerce Server, the only software that then supported secure http connections. We paid $3000 for a server with a 90 MHz processor and 32 meg of memory. And we paid a PR firm about $30,000 to promote our launch.
The Long Tail
Forget squeezing millions from a few megahits at the top of the charts. The future of entertainment is in the millions of niche markets at the shallow end of the bitstream.
In 1988, a British mountain climber named Joe Simpson wrote a book called Touching the Void, a harrowing account of near death in the Peruvian Andes. It got good reviews but, only a modest success, it was soon forgotten. Then, a decade later, a strange thing happened. Jon Krakauer wrote Into Thin Air, another book about a mountain-climbing tragedy, which became a publishing sensation. Suddenly Touching the Void started to sell again.
Random House rushed out a new edition to keep up with demand. Booksellers began to promote it next to their Into Thin Air displays, and sales rose further. A revised paperback edition, which came out in January, spent 14 weeks on the New York Times bestseller list. That same month, IFC Films released a docudrama of the story to critical acclaim. Now Touching the Void outsells Into Thin Air more than two to one.
