Stickiness is bad for business

It is common to hear entrepreneurs and investors talk about the high level of engagement (what we used to call “stickiness”) of their website.  They quite rightly believe that it’s better to have a more engaging user experience, as that generally means happy users. Unfortunately, the dominant advertising model on the web – Cost per Click (CPC) – rewards un-sticky websites.  As Randall Lucas said in response to one of my earlier posts:

The paradox, it seems is this: in a pay-per-click driven world, site visitors who want to stay on your site — due to it having the once-much-lauded quality of “stickiness” — are worth much less than those who want to flee your site because it’s clearly not valuable, and hence will click through to somewhere else.

Facebook recently became the most visited site on the web. Yet their revenues are rumored to around $1B – about 1/30 of what Google’s revenues will be this year. Google has the perfect revenue-generating combination:  people come to the site often, leave quickly, and often have purchasing intent. Facebook has tons of visitors but they generally come to socialize, not to buy things, and they rarely click on ads that take them to other sites. Facebook is like a Starbucks where everyone hangs out for hours but almost never buys anything.

The revenue gap between sites like Facebook and Google should narrow over time.  Cost-per-click search ads are extremely good at harvesting intent, but bad at generating intent.  The vast majority of money spent on intent-generating advertising — brand advertising — still happens offline. Eventually this money will have to go where people spend time, which is increasingly online, at sites like Facebook. Somehow Coke, Tide, Nike, Budweiser etc. will have to convince the next generation to buy their mostly commodity products. Expect the online Starbucks of the future to have a lot more – and more effective – ads.

A massive misallocation of online advertising dollars

In an earlier blog post, I talked about how sites that generate purchasing intent (mainly “content” sites) are being under-allocated advertising dollars versus sites that harvest purchasing intent (search engines, coupon sites, comparison shopping sites, etc).  As a result, most content sites are left haggling over CPM-based brand advertising instead of sponsored links for the bulk of their revenue.

But there is an additional problem:  even among sites that monetize via sponsored links there is a large overallocation of advertising spending on links that are near the “end of the purchasing process” (or “end of the funnel”). For example, an average camera buyer takes 30 days and clicks on approximately 3 sponsored links from the beginning of researching cameras to actually purchasing one.   Yet in most cases only the last click gets credit, by which I mean:  1) if it’s an affiliate (CPA) deal, it is literally usually the case that only the last affiliate (the site that drops the last cookie) gets paid, 2) if it’s a CPC or CPM deal, most advertisers don’t properly track the users across multiple site visits so simply attribute conversion to the most recent click, causing them to over-allocate to end-of-funnel links 3) if it’s a non-sponsored link (like Google natural search links) the advertiser might over-credit SEO when in fact the natural search click was just the final navigational step in a long process that involved sponsored links along the way.

What this means is there are two huge misallocations of advertising dollars online: the first from intent generators to intent harvesters; the second from intent harvesters that are at the beginning or middle of the purchasing process to those at the end of the purchasing process.  This is not just a problem for internet advertisers and businesses – it affects all internet users.  Where advertising dollars flow, money gets invested. It is well known that content sites are suffering, many are even on their way to dying. Additionally, product/service sites that started off focusing on research are forced to move more and more toward end-of-funnel activities.  Take a look at how sites like TripAdvisor and CNET have devoted increasing real estate to the final purchasing click instead of research.  For the most part, you don’t get paid for the actual research since it’s too high in the funnel.

As with all large problems, this misallocation of advertising dollars also presents a number of opportunities.  One opportunity is for advertisers to correctly attribute their spending by tracking users through the entire purchasing process (in the case of cameras, the full 30 days and multiple sponsored clicks).  Very likely, these sites are currently overpaying end-of-funnel sites (e.g. coupon sites) and underpaying top-of-funnel sites (e.g. research sites). There is also an opportunity for companies that provide technology to help track this better. Finally, if over time advertising dollars do indeed shift to being correctly allocated, this will allow research sites to be pure research sites, content sites to be pure content sites, etc instead of everyone trying to clutter their sites with repetitive, “last click” functionality.


Techies and normals

There are techies (if you are reading this blog you are almost certainly one of them) and there are mainstream users – some people call them “normals” (@caterina suggested “muggles”). A lot of people call techies “early adopters” but I think this is a mistake: techies are only occasionally good predictors of which tech products normals will like.

Techies are enthusiastic evangelists and can therefore give you lots of free marketing. Normals, on the other hand, are what you need to create a large company. There are three main ways that techies and normals can combine to embrace (or ignore) a startup.

1. If you are loved first by techies and then by normals you get free marketing and also scale.  Google, Skype and YouTube all followed this chronology.  It is startup nirvana.

2. The next best scenario is to be loved by normals but not by the techies. The vast majority of successful consumer businesses fall into this category. Usually the first time they get a lot of attention from the tech community is when they announce revenues or close a big financing. Some recent companies that fall in this category are Groupon, Zynga, and Gilt Group. Since these companies don’t start out with lots of free techie evangelizing they often acquire customers through paid marketing.

(My last company – SiteAdvisor – was a product tech bloggers mostly dismissed even as normals embraced it.  When I left the company we had over 150 million downloads, yet the first time the word “SiteAdvisor” appeared on TechCrunch was a year after we were acquired when they referred to another product as “SiteAdvisor 2.0″.)

3. There are lots of products that are loved just by techies but not by normals. When something is getting hyped by techies, one of the hardest things to figure out is whether it will cross over to normals. The normals I know don’t want to vote on news, tag bookmarks, or annotate web pages.  I have no idea whether they want to “check in” to locations.  A year ago, I would have said they didn’t want to Twitter but obviously I was wrong. Knowing when something is techie-only versus techie-plus-normals is one of the hardest things to predict.

Speculation on Apple’s purchase of Quattro Wireless

Apple has entered the online advertising business for the first time with its purchase of Quattro Wireless. They are now also competing head-to-head against Google in the mobile advertising market.

Mobile ads will be displayed to users either in a web browser or in a mobile application. Thanks to the iPhone and now Android, web browsing on mobile devices is becoming just like web browsing on the desktop. Sites are often running the same HTML – and the same ads – whether the browser is on the desktop or mobile web. Thus, if an ad network supplies ads to the nytimes desktop version, they’ll also supply ads to the nytimes mobile version. The battle for web publishers on mobile browser-based ads would seem to be the same battle already happening on the desktop web.  This battle is dominated by Google, Yahoo, Microsoft etc. and I can’t imagine Apple is trying to seriously enter the battle at this late stage.

Thus, Apple’s interest in Quattro must be about ads in mobile applications. Apple is currently in a very strong position with respect to app developers, given their tight control over the dominant app platform. How could Google supplant them there? For one thing, Android and other platforms could gain significant market share. But Google could threaten Apple even on ads in iPhone apps. Unless Apple forced developers to use their ad network, iPhone app developers would select the ad network that provided the highest payouts, which – as with all ad networks – would depend heavily on which had the most advertisers.

So the Quattro purchase seems to be mostly about Apple getting a base of mobile advertisers (not publishers) that will allow them to offer competitive payouts on mobile app ads (not mobile browser-based ads).

Why the web economy will continue growing rapidly

Here’s the really good news for the web economy over the next decade.  Consumers are spending more and more time online, yet only about 10% of all advertising dollars are spent there.

Let’s assume that, over time, ad spending on a medium becomes roughly proportional to the time consumers spend using that medium. I doubt there are any technologists reading this blog who doubt that in five years most people in industrialized countries will spend 50% or more of their “media time” on the web.  This means there are hundreds of billions of ad revenues waiting to move to the web.

Advertising is usually divided into two categories: direct-response and brand advertising. Direct-response advertising tries to get users to take immediate action. Brand advertising tries to build up positive associations over time in people’s minds. In the past decade, we saw a massive shift of direct response advertising to the web. The main beneficiary of this shift has been Google. We saw far less of a shift of brand advertising to the web.

It is therefore very likely that most of this new ad spending will be brand advertising.  This is why Google, Yahoo and Microsoft are all so intensely focused on display advertising. It is why they paid huge premiums to acquire Doubleclick, Right Media, and Avenue A.

Right now there are lots of inhibitors to brand advertising dollars flowing onto the web. Among them 1) most of the brand dollars are controlled by ad agencies, who seem far more comfortable with traditional media channels, 2) it is hard to know where your online advertising is appearing and whether it is effective, 3) banner ads seem extremely ineffective and are often poorly targeted, 4) big brand advertisers seem scared of user-generated content, today’s major source of ad inventory growth.

But economic logic suggests these problems will be figured out, because advertisers have no choice but to go where the consumers are.