Online privacy: what’s at stake

It is widely believed that a flourishing democracy requires an independent, diverse, and financially solvent press.  With print newspapers set to disappear in the next few years, the future of quality journalism is highly uncertain. This year, the online version of the New York Times will generate about $200M in revenue, a number that will need to approximately triple to support the current Times newsroom.

Most people who understand Internet economics believe that the best hope for online journalism is online advertising. Luckily, online advertising has significant room for improvement. Most of the revenue of the Times’ online business is generated through display ads. The main metric used to price display ads is derived from the rate at which users click on the ads, a rate which today is dismally low.  Thus the Times could continue to support its current newsroom staff if display ads became even moderately effective.

Lots of smart people are working on improving the efficacy of display advertising. Large companies like Google and Microsoft are investing billions in the problem. As usual, though, the best ideas are coming from startups. Companies like Blue Kai and Magnetic are bringing search intent (particularly purchasing intent – the core of Google’s profits) to display ads.  Companies like Media6Degrees are using social relations to target ads based on the principle that “birds of a feather flock together” (Facebook will likely start doing this soon as well).  Solve Media turns the hassle of registration into an engaging marketing event.  Convertro is working on properly attributing online purchases “up the funnel” from sites that harvest intent (search, coupon sites) to sites that generate intent (media, commerce guides). All told, there are a few hundred well-funded ad tech startups developing clever methods to improve display advertising.

Many of these targeting technologies rely on gathering information about users, something that inevitably raises concerns about privacy. Until recently, online privacy depended mostly on anonymity. There is a big difference between advertisers knowing, say, users’ sexual preferences and knowing users’ sexual preferences plus personally identifiable information like their names.  Like most people, I don’t mind if it’s easy to find my real name along with my job history, but I do mind if it’s easy to discover other personal details about me. When I’m not anonymous (e.g. on Facebook) I want to control what is disclosed – to have some privacy – but when I’m anonymous I’m far less concerned about information gathered for marketing purposes.

Before the rise of social networks, online ad targeting services (mostly) tracked people anonymously, through cookies that weren’t linked to personally identifiable information.  Social networks have provided the means to de-anonymize information that was previously anonymous. Apparently, the wall has been breached between 1) my real identity plus my self-moderated public information, and 2) my anonymous, non-self-moderated private information.

The good news is that the things users want to keep secret are almost always the least important things to online advertisers. It turns out that knowing people are trying to buy new washing machines or plane tickets to Hawaii is vastly more monetizeable than their names, who they were dating, or the dumb things they did in college. Thus, there are probably a set of policies that allow ad targeting to succeed while also letting users control what is associated with their real identities.  Hopefully, we can have an informed and nuanced debate about what these policies might be. The stakes are high.

Note:  As with almost everything I write on this blog, I have a ton of conflicts of interest.  Among them: I’m an investor, directly or indirectly, in a bunch of technology startups.  Some of these – including some companies mentioned above – are trying to create new advertising technologies. I am currently the CEO & Cofounder of Hunch, which among other things is trying to personalize the internet through an explicit user opt-in mechanism.

Will people pay for the New York Times online?

In Clay Shirky’s brilliant essay “Newspapers and thinking the unthinkable” one line stood out to me as odd:

“The Wall Street Journal has a paywall, so we can too!” (Financial information is one of the few kinds of information whose recipients don’t want to share.)

It is true that The Wall Street Journal is one of two newspapers (along with the Financial Times) that seems to have been pretty successful getting people to pay. It’s not clear why Shirky thinks people don’t want to share financial information. Hopefully he doesn’t think business people want to keep the Journal to themselves to keep some competitive advantage. Pretty much everyone in finance and business that I know reads the Journal every day – no one would seriously consider anything in there a competitive advantage. People send Journal links to each other all the time. It is background knowledge that everyone is expected to know.

The reason people are willing to pay for the Journal has nothing to do with their unwillingness to share or pirate financial information. It’s quite simply the fact that the Journal is a valuable business input that can’t be found anywhere else. Most people, when presented with something of value that is scarce and reasonably priced, don’t pirate (especially when they can charge it to their business). The revenue-maximizing price of any good – including digital goods – is determined by value and scarcity, not what it costs to produce it.

The fact that the cost of distributing newspapers is dropping to near zero only affects the price of newspapers if the content is commoditized. The problem the New York Times has isn’t that people are willing to share or pirate their content.  It’s that with the advent of the internet, competition for general news went from one or two per market to thousands per market. (The other big blow was classifieds getting decoupled from newspapers).

Most business people I know consider the Times an essential daily read, not just for its business and finance news, but also its section A news and op-eds. If you are a running an operating company or investment firm you want to know not just narrow business news but the broader context of what’s happening in the world.

Most smaller newspapers will go out of business over the next few years, vastly increasing the scarcity of news. If the Times creates content that is scare and valuable – and remains an essential “business input” – it can have the same success online as the Journal.

Yahoo should invest in products, not advertising

For 10 years, Yahoo was my default home page.  Now I can barely stand using the site.  I still use it for Finance and Flickr, but that’s it. The new home page design has windows popping up everywhere and mind numbing celebrity gossip up top.

Now we learn Yahoo is going to spend $100 million on an advertising campaign.  The slogan is “It’s Y!ou” which sounds like one of those meaningless taglines invented by PR firms.  I’m quite sure no one will remember it and their money will be wasted (quick, name the tagline of any big tech company).

By CEO Carol Bartz’s own admission, Yahoo is incredibly well known, especially outside of techie circles:

When you get outside of New York City and Silicon Valley, everybody loves Yahoo…. We do great things for [users] and we’re excited about what we are.

Yes, Yahoo has one of the best brands on the web. Which is precisely why they shouldn’t be spending $100M on branding.  That’s the last thing Yahoo needs.  What they need are new technologies, new revenue streams, and new products that people love.  If they can’t build those things themselves, then they should acquire them.  They’re coasting on inertia right now.  As we saw with AOL and countless other tech companies before them, that inertia will be lost if they fail to innovate.

I think the Yahoo-Bing search deal is a great thing for startups as it potentially makes search competitive again.  But as a longtime Yahoo user it makes me kind of sad.  Between the branding campaign and the search deal, it feels like Yahoo has thrown in the towel.

Google and newspapers: the false choice of opting out

First let me say I love Google.  I think Google created one of the greatest inventions of the past century and continues to give back much more value to the world than they “capture” in revenue.

Secondly, I think Google itself has almost nothing to do with the decline of newspapers.  That is due to, among other things, 1) the newspapers losing their classified business to Craigslist and others, 2) the internet making geography irrelevant and hence causing newspaper competition go from 1 or 2 papers per market to thousands.

That said, I am bothered by the arguments I hear in internet circles of the form:

Premise 1:  X can stop working with Y at anytime.  (NYTimes could opt out of Google search results / Google news at any time)

Premise 2:  X would lose out if it did that (NYTimes would lose traffic and revenue if they opted out of Google).

Conclusion:   Hence Y is helping X.  (Google is helping the NYTimes and the NYTimes should stop whining.)

The conclusion doesn’t follow from the premises.  The NYTimes might in fact be better off in a world without Google.  More specifically, they would be better off if the search engine market were genuinely competitive.

The power dynamics between Google and the newspapers has the same dynamics of any buyer-supplier market.

Newspapers, like all websites, are suppliers of content to Google.  In most markets, with genuinely competitive buyers and suppliers, the revenues are shared between buyers and suppliers in proportion to their relative bargaining power.  Their bargaining power depends on how fragmented each side of the market is – how many genuine alternatives each company has.

Normally there is some reasonable level of interdependence between buyers and suppliers, hence the revenue split is positive and non-negligible. Pepsi and Coke are always jostling with their bottlers about the percentage split but in the end each side usually makes a profit.

And in situations where the relative bargaining power is severely imbalanced, there are normally business mechanisms for correcting the imbalance.   For example, before Staples was founded, office supply stores were mostly mom-and-pop shops that were tiny relative to their suppliers, and hence had very little bargaining power.  The central business concept behind creating Staples was to “roll up” these shops and thereby increase their bargaining power with their suppliers.  In doing so, they were able lower their costs and increase their margins even while lowering their prices.   One of the primary reasons companies merge is to increase bargaining power with respect to buyers and suppliers.

As a “buyer” of web content, Google has incredible dominance, so much so that the price they pay for that content is zero.  If the NYTimes decided to opt out of Google tomorrow, Google users would barely notice.  (Perhaps the only content site that would matter and hence in theory could bargain with Google would be Wikipedia – but even Wikipedia only accounts for ~2% of Google click throughs).  On the flip side, the NYTimes would see a massive decrease in traffic and hence ad revenues.  Google has so much power they can split 0% of the revenue for organic traffic (and of course charge for paid links).

Now imagine a world where search engines are truly competitive.  I know it’s hard – but imagine there are say 20 search engines, each with 5% market share.  And suppose they differ primarily according to which content sites they index.  (I am not saying I’d prefer this world – I’d actually hate it – but please bear with me for the sake of argument).   On the content side, suppose there are only a couple of newspapers left – maybe the NYTimes, WSJ, USA Today, and the Financial Times (which, btw, will probably be the case in a few years).  In this situation the newspapers would have enough leverage to get the search engines to pay them for inclusion in their organic listings.  I know that in my own case if two search engines were nearly identical except one included my favorite newspaper and the other didn’t, I’d use the one that did.  I suspect a lot of other people would make the same decision.

There is nothing inherently un-monetizable about newspaper content.  Like all goods and services, if newspaper content has value to people and is scarce (it’s not scarce today but as more newspapers go out of business will become increasingly so), they can eventually generate sustainable revenue (albeit probably operating at a much smaller scale).  The revenue can come either through consumers paying directly or buyers like Google sharing revenues, or some combination thereof.

For the moment, and for the foreseeable future, newspapers (and all content sites) just happen to be in a dreadful bargaining position with respect to Google.