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When Is A Market Really A Market?

December 1, 2005 Venture Capital and Technology | Comments (20) | TrackBack (5)

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» Platforms, Mashups, and Markets from Jeremy Zawodny's blog
Yesterday Greg Linden asked Is Web 2.0 nothing more than mashups? In that post, he makes the following claim: Companies offer web services to get free ideas, exploit free R&D, and discover promising talent. That's why the APIs are crippled with restric... [Read More]

Tracked on Dec 1, 2005 5:38:18 PM

» The Ultimate Online Ad Marketplace Will Come from Conversion Rater
Fred Wilson brings up a topic he has before and thats the future of the online advertising industry. His focus in this post is if its really a market. What interests me though is this: Toward total price and performance transparency ... [Read More]

Tracked on Dec 3, 2005 11:23:11 PM

» Hail Shiva, destroyer of margins from Greg Yardley's Internet Blog
Paul Kedrosky's "Craigslist as Shiva" combined with Fred Wilson's "When Is A Market Really A Market" and my recent reading up on stock exchanges just made something go *click* in my brain. Intentionally or not, Craiglist succeeded because they under... [Read More]

Tracked on Dec 4, 2005 6:42:52 PM

» Towards an Open Advertising Marketplace in 2006 from Paul Needham's Blog
It's exciting to see that others share our conviction that it's time for a truly transparent and open advertising marketplace. Pat McCarthy of Conversion Rater gives it a mention in his shortlist of predictions for 2006. Meanwhile, others think that [Read More]

Tracked on Jan 3, 2006 7:42:48 PM

» Towards an Open Advertising Marketplace in 2006 from Paul Needham's Blog
It's exciting to see that others share our conviction that it's time for a truly transparent and open advertising marketplace. Pat McCarthy of Conversion Rater gives it a mention in his shortlist of predictions for 2006. Meanwhile, others think that [Read More]

Tracked on Jan 3, 2006 8:04:29 PM

Comments

Yeah I think this is coming, but I think a REALLY important question to ask is "who is advertising?" It's not just the big campaigns (though it would be terrific to open them up), it's the local businesses, the mom and pops, the eBay stores, the even the rock bands (one took an ad on my blog this week)....increasing the "who" - and maing it easy as well as transparent - will increase the market.

Posted by: Tom W. | Dec 1, 2005 11:08:36 AM

Another sign that online advertising is a nascent market is the range of estimates with regard to the market's size. Or perhaps the Goldman, Sachs number is US only?

For example, Thomas Weisel Partners estimates the global 2005 online ad market to be $21.3B, an increase of 40.1% from last year. Their model is also built in a bottom up manner, including primary data from 18 companies in their "coverage universe that should each garner more than $50mn in online spending in 2005."

Of that $21.3B, the US represents $13.0B, an increase of 33.0%. In that same time period, however, the non US revenue increased 52.9%. Wowza.

Posted by: Class V | Dec 1, 2005 11:19:03 AM

nice post, as usual. minor insight here; Overture allows you to see 1) the traffic each keyword gets and 2) what the competition is spending on that keyword and 3) who is spending what on it. It's not aggregated well, but it's available. Now, we don't know the individual budgets of each of the competitors, but we make our own guesses based on what appears and how often in tests.

Posted by: charlie crystle | Dec 1, 2005 11:27:29 AM

Is this not what your friend at root is trying to create fred?

Conceptually it makes sense, but i am reminded of many other bubble era 'marketplace' business models that attempted to provide this transparency and liquidity and failed. I guess the better question therefore is, are the characteristics of the marketplace ripe for this - and characteristics being obviously beyond market size and more along the lines of 'inbalance of buy and sell side' not to say that the ad market is in anyway comparable to a match.com type scenario (too many guys) but i am definitely lost when i consider whether the 2.0 type web services approach to a marketplace could provide the real ignition to this nascense?

Posted by: mark s | Dec 1, 2005 11:57:13 AM

Fred,

I like your thoughts on massive liquidity in an exchange marketplace. I also read your post about Root Markets, which I found fascinating as well.

I think we need to discuss the role of speculators in this hypothetical exchange. If online ad buys were like futures contracts, you would have a whole bunch of speculators with no interest in taking delivery of the ad contracts, but instead were betting on price fluctuations. And this is where much of the liquidity would come from. I suppose a number of economic factors would influence ad contract pricing and trying to standardize ad contracts would be very complex. (Is an ad buy on Forbes.com equal to an ad buy on Fortune.com? I will let somebody else answer that) Starting up such a marketplace would be a challenge fit for Lew Ranieri and his gang.

Anyway, I have been working on something like this for a number of years now. Not for online ads, though. Instead, a consumer products marketplace which combines online auctions with certain attributes of an exchange marketplace. Massive liquidity would be the driving force.

Posted by: Hugh Lang | Dec 1, 2005 12:27:52 PM

I'm trying to understand all that I've read in this post and its comments, but I sheepishly admit that a lot of it still goes over my head. (Certainly the number $12.3 BILLION is stuck in my mind.) So I just wanted to ask: Where can I find the fool's guide to things like transparency and liquidity? Any guidance would be greatly appreciated!

Posted by: Easton Ellsworth | Dec 1, 2005 3:18:37 PM

An issue to consider is how open source can circumvent online advertising via Firefox with Adblock.

It's currently marginal considering Adblock has been downloaded by less than 1M. I use it and I don't see any ads at all. It's another world: try it.

Open source software has the potential to completely remove ads or relegate ads to a "click to help your friends model". I speculate we will uncover a huge click fraud expose over the next year that will chill the ad market. Right now, it's red hot. This is the peak and like all peaks it makes some sense or at least enough to keep people believing. This is pure speculation and has no basis in fact. Cheers.

Posted by: Marina Architect | Dec 1, 2005 4:46:33 PM

I also whole-heartedly agree that online media (and any digitally-delivered as it comes to be) is ripe to move from today's very unproductive rep>buyer>planner transaction exchange to a far more productive automated system (where media can be bought/traded/sold in an exchange like environment).

I'm watching Seth Goldstein's efforts here very closely. It makes sense to me why he would focus on the lead gen market in this phase, as it's easier to compute a hard valuation, anyone whose tried to value atomic pieces of branding-intended advertising will concur.

However I don't think it's unreasonable to look down the line and see us get to a point where every single piece of online media could contain an intrinsic value, and be traded around that value, just like securities are today.

Economics is going to dictate this if the move to a sell-side model outweighs any additional transactional costs from market speculators. Speculation in the market seems to me to be the largest cloud on the horizon for this.

Posted by: Greg Johns | Dec 1, 2005 4:59:50 PM

Not all publishers are created equal. Myspace has 500 pageviews per unique user per month. Would you pay $1.00 CPM which is effectively 50 cents a unique user to show a ad to someone on myspace, or would you advertise on CNN where its maybe 800 unique users for every 1,000 pageviews.

This is the reason google dominates and mass market CPM advertising is as good as dead.

Right now, advertisers on google set a daily budget and the highest paying advertisers budgets are exhausted every day. The advertisers budgets are split into 24 hours and google will only spend up to that cap.

What you are suggesting is that any spam site in the world can come along and say Hey i want to have nothing but home equity loan ads on my site from company abc and they are going to pay me $20/click. The avertisers converions would drop like a rock and the whole system would collaspe.

Posted by: Markus | Dec 1, 2005 10:38:53 PM

Markus, I think your ignoring checks and balances that could be built into such a marketplace to keep that from happening.

Being transparent and open doesn't mean people advertisers must accept all publishers if performance is poor. There are also ways to watch and catch impression fraud and click fraud from occurring on a wide scale basis.

In many ways, making it transparent and liquid makes it LESS likely for fraud and bad performance to be tolerated.

Posted by: Pat McCarthy | Dec 2, 2005 2:08:32 PM

Traffic is very liquid.

And a lot of fun to trade too!

Posted by: PJ Brunet | Dec 3, 2005 12:52:15 AM

I've been an online media buyer and internet entrepreneur for 7+ years now and am still skeptical of a system that makes online advertising completely transparent. Why? Consider this:

I have a target cost per acquisition of $20. I know that big players that have large volume and negotiating leverage commensurate with that are willing to take my deal at $19. I also know that small players will take my deal at $10. Why would I make my deal publicly available at $19, thereby wasting the extra $9 I would make from small publishers through DECREASED transparency? And before someone says "set up a tiered program where larger volume gets you a higher CPA", that's just an invitation for scorn from smaller publishers. If you say that you'll pay $10 per signup to small guys and $20 per signup from larger guys, the small guys know that you CAN pay $20 a signup and will scoff at your piddling $10 offer. They'll come to you direct and say "well, I could make this work at $20, but not at $10, what can you do?". And you'll take them at $20, or $18 or whatever.

With CPM deals, a completely transparent system is not even close to being feasible. The number one issue with the online advertising industry is trust. If you trust a source, you may be willing to pay $5 CPM. If you don't trust them, you may still test it out, but at a much lower CPM. Actually, now that I think about it, an eBay-style trust rating system would be VERY useful in the online advertising market. Maybe with something like that involved a more open market would be more feasible.

"Open source software has the potential to completely remove ads or relegate ads to a "click to help your friends model". I speculate we will uncover a huge click fraud expose over the next year that will chill the ad market."

I really doubt it. Advertisers don't look at number of clicks; they look at number of conversions compared to cost of advertising. Anyone who knows what they are doing is buying search ads based on back-end performance, so advertisers are not really hurt by click fraud at all, unless they are clueless and not tracking performance. The people that are hurt by click fraud are not the advertisers, but the legitimate search publishers.

Posted by: Rockwell | Dec 4, 2005 8:23:12 PM

Rockwell's theory is like maxwell's! Undeniable, logical and applicable.

But Fred's genius in coming up with this idea and blogging it is like watching Jimmy Hendrix play!

My 2 cents is that - to create a proliferating market place, it is important that the owner of the commodity set the base price and open it for bargain only when supply exceeds demand. Now that is where the problem lies. There is a 12bil online market (headed towards to 20bil, let s say) and an almost equal number of webpages (retailing units, bill boards) out there... And there will be a ton more if the online ad market promises little more green!

So, the big advertiser is still sadly going to be the king even in an open market while small businesses get crushed (TV commercials).

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