Oliver Thylmann’s Thoughts

Lots of social networking stuff happening in the last few days. First Christos Cotsakos, former CEO of E*Trade, has raised $29.6 million for Moli, a new social network, after having put in something like $20 million himself. The company is already at over 50 people plus more offshore. GigaOm has a good review online, with the biggest special thing of Moli being the option to have several profiles folded into one, meaning you have one for work and one for family, with different information shared within them. At the same time, Techcrunch posts that Lookery is offereing advertising runs on Facebook Apps for $0.125 CPM, which is awfully low. Then chatty Mark Zuckerberg talks about numbers at a company  event, which leak: 2007 saw $150 million in revenue, 2008 will see $300-$350 of revenue with $50 million EBITDA but $200 million of CapEx (read buying servers and the like), so a loss of $50 million. If we take EBITDA like Earnings (just to make it easier because they will never buy stuff again … yeah right … never mind … let’s go on) then the $15 billion valuation would add up to a P/E ratio of 300! Forward P/E that is. Now that’s a valuation to look for!

The problem is that in the Google Earnings Conference Call, it just came out that monetization of social networks is really hard, advertising wise. Xing is in a very good spot here because they are monetizing via their users. Within our own platform, the social network is just a side effect that gets used. Pure play social networks will either have to become really really huge, or will most likely face a problem. At $12 cents cpm, even thinking a site is fully sold out, and gets 2 ads per page, that would result in $240 for a million site impressions, meaning $2.4 million of yearly revenues for a site like StudiVZ+SchuelerVZ. That is really nice, no questions asked, and a lot of nice things can come of it. The problem again might be that there is a social contract between the networks and it’s users so any new push to monetization in a new way might lead to a revolt of the users.

Facebook is surely on a good way, but it will be interesting to see their next investment round, in light of possibly further bad news, or an IPO to see what they are really worth. Microsoft couldn’t care less because the investment was more of an ad buy, but for the other investors, I don’t know.

So Facebook is worth $8 Billion. I agree it is worth a lot and it can be something that is very powerful in the future. I actually believe it will. But the $8 Billion are surely not based on current revenue. They had 15.8 Billion Page Impressions in the last month. Let’s presume they have all available inventory sold. Judging by this post they would make $2.6 Million a month, so $30 Million a year, meaning $8 Billion is a price to sales multiple of 266! And if you take this post, then you will start to wonder if they are fully booked because the ads do not really work well.

I remember the old times when monetizing discussion boards was hard and social networks are similar. People are just not there to buy something but are there to interact. Facebook can probably make good money on strong branding campaigns (needs to be something more than banner ads), and have a good revenue floor with CPA deals, but making a billion or two in revenue in the near future seems unlikely.

Just presume the traffic from Facebook converts amazingly well (which as I hear it doesn’t), so you have a lead rate of 10% on a lead campaign where you make $30 per lead. Then 100 Clicks makes you 10 Signups and hence $300. At the 0.05% click through rate that seems to be average on Facebook, that means you need 200.000 ad impressions to get those clicks. You could then spend $1.5 CPM to not turn a loss. Based on other numbers, the CPM is more at $0.17, meaning that the lead rate is more at 1%, which seems likely.

The cool thing is though that you might, through the exploitation of Facebooks Application Platform, keeping people on the platform with the ads, fostering more trust, embedding conversion there, … increase your conversion … then it gets interesting.

So will they be bought under $8 billion? Nope. The potential is there, it is just not clear yet what it is. With Google it was different, there was real revenue there and real reason why it would grow.

I once again strolled over to Axel’s blog for something and it reminded my that I wanted to write something in reply to his Viral Social Commerce posts. With just having finished a bit of planning to get the current sprint done and the next one spec’d I thought it’s a good time as any.

First of all I really like his postings in general, and these two really rang a bell as they are so clearly linked to what we do here. Let’s take one specific part:

Even more market volume may be created by opening the advertising market to new segments that, until now, had a high cost barrier towards advertising, for example in the Long Tail of smaller and mid-sized companies, or in niche markets which had to rely on direct marketing because there was no medium for them to address at sales efficient cost on a large scale.

I agree with him that user generated content companies have a different cost structure and might hence be able to live on lower CPM advertising than a big old-school publisher. This lower CPM advertising can then also come from smaller companies, but the problem that comes in there is that smaller companies do not have the resources, or knowledge, to run web campaigns. It’s just not their business and shouldn’t be. Above that several millionen small business can’t talk to agencies to handle their advertising buying. It needs to be easy, understandable and with measurable performance. And if you do it right and target it right, it is actually far from lower end CPMs. The last bit is where he also agrees.

on-demand fully trackable horizontal niche long tail CPA advertising

[…] My point in this Blog post is that there have to be, and there will be business models beyond advertising and they are starting to emerge. Essentially these will be transaction based and will be centered either around the handling of goods in an e-commerce sense (that is already being seen in a number of start-ups) for example, by itravel, but there will also more and more be transaction platforms centered around services, much in the sourcing logic mentioned above.

Hell yes. The thing is that the trackability of online media really allows for performance based advertising. I started an internet statistics company in 1996, so I do love statistics. But where does this lead. Facebook will convert a lot worse on a CPM basis than some other big publisher, but I will not have to negotiate deals with Facebook other than a revenue share and targeting systems will make sure that the right ads run at the right time and in the right place. Through the CPA model I move from an advertising channel to a sales channel and the budget there is a lot different. Above that, it is understandable for smaller publishers. I get the contact data of somebody interested in my services. No need for a web site, adwords campaign pro, SEO, campaign management, Flash Ads, … . All taken care of.

There is still one problem though, millions of small advertisers. That is where another strength of the internet comes in, aggregation. There might be lots of different small advertisers but many times they can be aggregated around services and they themselves serve only their local market. This is what Ormigo does. We give small advertisers a way to attract new customers in their local market, and aggregate them to become really powerful marketing force with real budget that is relevant even for the biggest players out there. Especially for services this is possible.

In his next post he goes into a bit more detail.

So cutting back on Web 2.0 technology by seeking not a mash-up of all the functionalities that happen to be the talk of the town and instead looking for ways to create real value with Web 2.0 technologies requires, first, an analysis not of Web 2.0, of these technologies or even of the Web 2.0 early adopter crowd.

This is something I have been repeating for a long time. Most of these Web 2.0 features, be it social networking, tagging, user generated content, … are features, not a product in itself. You have to address a need, help somebody that has a problem, and sometimes, some of these new capabilities will allow you to do just that a lot more efficiently. People are wondering why we are becoming a social network, and I can only tell them that it’s a side effect. We help local merchants get new customers, and that leads to social interaction, and that leads to more customers, and more knowledge, and better matching of clients and merchants. That is also why social networking capabilities have not been our first step, and are still under developed.

Marketing then becomes not just a communication task but becomes much more a framework for the company’s role as the

host of a community of customers.

Good words to end this. The achievement is reaching an equilibrium between users, customers and publishers. For us, a potential field to achieve this is the local market. It’s interesting for all three and Web 2.0 enables clear benefits for all. Standard ads are just a start. Much more can come from this. As others have said, Web 3.0 will be about agents, among others. Interesting times ahead.

(Update: A few hours after I wrote the following, Microsoft buys aQuantive, one of the last banner servers not owned by the big ones. See more at Techcrunch. I’ll keep the article as it is for now It seems that all the big ones now have their Banner Server. )

There was a time when banner server companies were something special. You needed a DoubleClick (bought by Google) because if you used somebody else, the counting differences between the publisher banner server (DFP) and the agency banner server (DFA) would be too big and result in friction. I never really understood that part because it can be reasoned away, no longer being a problem, but it seems that it is too much of a pain to use a sometimes better banner server.

But I am loosing focus. More Banner Server Providers came along like Falk eSolutions (bought by DoubleClick) whom I met ages ago in a pitch at the place I worked at back then. I have to say that they were technologically superior … oh but the counting differences. Then you have Ad Tech (now bought by AOL) and just yesterday WPP acquires 24/7 Real Media. With all the “bought by” behind the names it becomes clear that Banner Serving is a hot topic at the moment and that it will likely move to become even more of a commodity. After the last bubble (no we don’t have a bubble at the moment) prices have dropped considerably for what you pay in CPM for delivering your ads. The problem of course is that the potential companies to work with are thinning slowly bug surely (unless you want WPP, Google or AOL be your Banner Server Providers ;)) so these prices might increase again. A few are left though like Adition here in Germany which seems to be a good solution, and of course OpenAds. Then there is the mightly aQuantive with Atlas Solutions and also emediate. There are likely others I forgot (leave a comment) and of course there are lots of targeting companies at the moment that just plug in to a banner server, like wunderloop. Above that there are the market places like Right Media (bought by Yahoo!) who have a great demo by the way!

Lots of companies out there, all growing well, and things are moving closer together. Companies are slowly seeing that internet is core to what they do and they are investing into that. The best sign of that is WPP going into the Banner Serving Space.

The problem is that simple banner serving is no longer special. Service is what distinguishes and special features above the standard. Having built one specialized banner server already, and now building another system I would call a solution rather than a server, I can tell you that building your own can make sense in many cases. Especially if like us you have the knowledge in-house including one of the original Falk eSolutions developers. This is especially true if you need something different than a standard top of the fold big size banner.

And this is where the space will likely be moving in the future. We need APIs more than ever in this space as there will be more small systems, specialized for the portals they are used on, as well as some big players with lots of power behind them. We need a real market place not created for making money but for facilitating performance. This is a performance play people! We can measure things and as soon as we can we do we are moving in the performance mode. Currently this is the internet space, but it will become standard in many other places because rather sooner than later (probably later and bigger because we always overestimate but that’s another point ;)) lots of things will become measurable. Digital Paper, TV with a backchannel.

I really see a VISA like structure to be established as a non-profit. Problem is that only the good ones would win. Transparency would be king. And we are not there yet. We are still in the wining and dining business and it’s probably going to remain that way for some time. But it’s good seeing the buying action because it shows that things are changing and ad serving is becoming central to the strategy of the big ones. That opens us up for new thinking. Looking forward to it. But first I need to revolutionize the local market.

Techcrunch has a good post on why Panama is important, not only to Yahoo!, but to the rest of us. I agree fully with Michael on this is very important to get more competition in the space. For monetizing traffic for big publishers, we competed with Google AdSense at what is now Ligatus and did so very well, based on different methods and a slightly different idea. Now with Ormigo we are actually banking on a different methodology again, also simply exploiting the multitude of networks that are out there. If you are working on a clicks based system, you need to be huge to compete and I am gladly letting that be handled by the likes of Google, Yahoo! and Microsoft. But still, with this system, a lot of advertisers are left out in the cold, and I don’t think Google’s move to give companies a free web site to advertise on AdWords, will be a real change in this. There are just a lot of people out there who shouldn’t have to care about AdWords, conversion, optimization, multivariant testing, and the like.

All in all, this will be a good year for Yahoo! on the search/clicks marketing front and while I am not sure choosing ad rank based on CTR and Click Price increases the click price itself, it sure as hell increases the CPM, which is what sites really care about. The problem comes in with those networks going for the agencies and the big companies, and then the big publishers suddenly don’t want to play that game anymore, because the would rather talk to those companies directly, and get a lot more money out of them. It will be an interesting 2007. Let’s all have fun.