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Media Futures, Part 5/5: ARBITRAGE: V. Therapy

19 Jun


Food for Worms

King. Now, Hamlet, where’s Polonius?

Ham. At supper.

King. At supper? Where?

Ham. Not where he eats, but where he is eaten. A certain convocation of politic worms are e’en at him. Your worm is your only emperor for diet. We fat all creatures else to fat us, and we fat ourselves for maggots. Your fat king and your lean beggar is but variable service- two dishes, but to one table. That’s the end.

King. Alas, alas!

Ham. A man may fish with the worm that hath eat of a king, and eat of the fish that hath fed of that worm.

King. What dost thou mean by this?

Ham. Nothing but to show you how a king may go a progress through the guts of a beggar.

(Shakespeare, Hamlet, Act IV, Scene 3)

Following his murder of Polonius, Hamlet starts talking about worms.  As a subject, worms are disgusting and it is easy to simply brush his comments aside as the incoherent ramblings of an antic disposition.  But there is something that gripped me as I have been re-reading this.  What does Hamlet mean by “variable service” and is it really “progress” if a beggar is simply remixed as a King? 

*

Media Therapy

Another month has gone by as I have been collecting my thoughts for this final section of Media Futures.  As you know, I have been looking for the light at the end of the tunnel of Internet Arbitrage.  If automata is a form of artificial life, then it is the function of arbitrage to extinguish such life through the systematic liquidation of all vital spreads.  Arbitrage is a key lubricant for any emerging market economy.  The conventional meaning of therapy is overdetermined by the specter of Freud and the practice of talking about your childhood to a shrink on the Upper West Side.  But this is only one context, and I would like to remove the practice of therapy from psychology per se and introduce it into our conversation about Media Futures.

Tb_free_therapy_2Let us understand therapy to be the practice of working with decay:  decay in the sense of something that has happened and needs to be worked through in order for one to move forward, grow, prosper, profit, progress, develop.  Therapy can happen in a variety of ways so long as it is a dynamic process.  Talking, writing, reading, shopping, running are all potentially therapeutic processes in so far as they act on prior conversations, states and conditions.  In describing how we use language to create a meaningful social environment, Wittgenstein says that "in the practice of the use of language one party calls out the words, the other acts on them" (PI, #7).   

What the Internet has enabled is an “acting-upon-ness” of singular historical scope and scale.  I was recently at an exhibit at the ZKM in Karlsruhe called “Making Things Public: Atmospheres of Democracy” curated by French Anthropologist Bruno Latour and New Media Philosopher Peter Weibel.  The core assumption is that we have always used communications and computing instruments to participation in the architecture of social meaning.  The Internet has simply normalized our feedback to the point where our interests are indistinguishable from the history of our click streams.

Not that this is an avant garde European theory, just look at the recent cover of Business Week:

Bweek_coverThe poster for the ZKM exhibit was a giant quote from Tom Watson of IBM stating “There will be a need for no more than 5 computers in the world.”  The intended comment I believe was to show how far off he was on the downside.  For me, the error was on the upside, for there really is only one computer and it is called the Internet.  Yes, there are billions of CPUs out there each of which is technically a computer but in so far as an increasing majority of them are connected or connectable via TCP/IP, then they collectively form the I/O extensions of a single social computing machine.

And so now we can go back to thinking about our 5 A’s of Media Futures: Automata, Algorithm, API, Alchemy and Arbitrage   in the context of this computer that we are all acting upon.  Our actions, expressed as Attention, establish networks that connect us, our family, our friends, our colleagues and our affinities. 

As we spend time online we are actually impressing ourselves upon certain links within these social networks and choosing not to impress ourselves upon other links.  Our most popular email recipients and instant message buddies, our bookmarks, our cookie trails are residues of where we have decided to pay attention.  The net currently has a schizophrenic but unique way of remembering bits and pieces of these attention streams:  Not all data is captured; the consumer has no central attention management tool; and most companies don’t want you moving your history between their networks anyway. 

Despite these points of friction, more and more applications are being built upon our attention streams.  Every new web application or mash-up from HousingMaps to Backpack to Del.icio.us is simply a better enabler of some existing user behavior.  People were using Google to find Craigs Listings, people were using wikis and blogs to manage their projects and to-do lists, people were storing and sharing their favorite links for themselves and their friends. 

It is the promise of Internet media to know everything about you so that it can engage you in an intimate conversation with advertisers around specific products you are looking to buy.  But we are still many years away from a truly personalized advertising experience.  In the meantime, architects of participation are channeling specific community zeitgeists into hyper functional media products.  The consumer is invisible in the moment, leaving only traces of her clickstream behind her as a trail of evidence.  Innovations in internet media are like handfuls of white flour dropped over the invisible outlines of consumer intention.  At times, user behavior drives media construction directly, but at other times the original user behavior evolves beyond the ability of the media to engage it.  These hollow shells of former behavior are being swept up constantly by domain, banner, click-thru and lead brokers who recycle the detritus into more usable (aka monetizable) impressions.

Remediation is the removal of pollution or contaminants from land (including sediments in waterways) for the general protection of the environment.  Remediation in terms of new media, is the representation of one medium in another. (from wikipedia)

The process of remediation has become the status quo of Internet media consumption.  What we consume online is likely the residues of other people’s behaviors.  Innovation occurs through the subtle differences between my behavior and that of everybody else who has formed the sediment that I now surf upon.  In so far as my strange behavior becomes reinforced by that of others, then I am creating the foundation for new forms of media.  These are typically the alchemical moments when the mad scientist designs a feature that becomes a product that becomes a company.  Josh Schachter transformed del.icio.us from a link storage feature for him, to a link sharing product for the community to a link sharing company for investors.


MagArb

If we are comfortable describing the process of Internet innovation as a form of remediation, then we might as well put Hamlet’s worms back on the table.  Worms are like arbitrageurs: nobody likes them very much but then again nobody questions the role they play in making markets more liquid.  The covalence of arbs and worms should not come as a great surprise, since I am sure many of the greatest financial arbitrageurs have been referred to as “maggots” as some point in their careers.  This may however be the first time a maggot has been called an arbitrageur.

The technical term for using worms as a form a medicine is Biotherapy. Shakespeare’s cure for Polonius was hundreds of years ahead of its time.  In February 2003, the BBC ran a story about a novel approach to treating wounds:

Maggots heal hospital wounds
A hospital in Northern Ireland has been using an unorthodox treatment involving maggots to treat wounds where modern medicine has failed to cope.  Known as larval therapy, the maggots eat dead tissue, but leave healthy tissue alone.  Although staff at Daisy Hill hospital in Newry were initially skeptical, clinical specialist in tissue viability Jenny Mullan said the treatment produced "unbelievable" results.  Hospital maggots are specially bred for wound treatment. They are sterile and are usually of the green blowfly variety as this species only ingests dead tissue.  The therapy was first used at the hospital on a diabetic patient, who had recently had a limb amputated and developed a pressure sore on his other heel.  The patient reported that the pain had been reduced, said Ms Mullan. Even so, maggot therapy may have  a bright future. According to Handler, they’re cheap, they don’t become ineffective over time like some antibiotics, and they work. "Especially as doctors are getting stretched thinner and thinner," he said, "it will be helpful for them to conserve their resources and use maggots." (emphasis mine)

LarveI like the irony of doctors “stretched thinner and thinner” using maggots as an enriching way to “conserve their resources.”  This expands the conventional meaning of worms as consumers to embrace worms as creators.  The very fact that these worms are recycling, remediating and remnating diseased tissue is in itself a creative activity, not unlike many of the Web 2.0 mashups that synthesize a vital new experience from two or more existing web services.  All of these examples underscore the core thesis of Internet media therapy, namely the ability for quantitative reorganizations to produce qualitative change.  This is perhaps best exemplified online by the Web API which routes multiples streams of data input into (the potential for) a qualitatively different stream out.

The relationships between worms in the organic and Internet worlds is a rich vein of interpretation.  In both contexts they provide an infrastructure for processing decaying materials.  At the end of his life, Darwin became obsessed with worms and his penultimate book of 1883 was in fact entitled The Formation Of Vegetable Mould Through The Action Of Worms With Observations Of Their Habits; in it, he writes:

Worms have played a more important part in the history of the world than most persons would at first suppose. In almost all humid countries they are extraordinarily numerous, and for their size possess great muscular power. In many parts of England a weight of more than ten tons (10,516 kilogrammes) of dry earth annually passes through their bodies and is brought to the surface on each acre of land; so that the whole superficial bed of vegetable mould passes through their bodies in the course of every few years. From the collapsing of the old burrows the mould is in constant though slow movement, and the particles composing it are thus rubbed together. By these means fresh surfaces are continually exposed to the action of the carbonic acid in the soil, and of the humus-acids which appear to be still more efficient in the decomposition of rocks… When we behold a wide, turf-covered expanse, we should remember that its smoothness, on which so much of its beauty depends, is mainly due to all the inequalities having been slowly levelled by worms. It is a marvellous reflection that the whole of the superficial mould over any such expanse has passed, and will again pass, every few years through the bodies of worms. The plough is one of the most ancient and most valuable of man’s inventions; but long before he existed the land was in fact regularly ploughed, and still continues to be thus ploughed by earth-worms. It may be doubted whether there are many other animals which have played so important a part in the history of the world, as have these lowly organized creatures. 

Darwin establishes here two core principles that we have been working through in a variety of contexts:

  1. Finished products (be they Darwin’s smooth, “wide, turf-covered expanse” or today’s Google homepage) are the consequences of worm arbitrage.
  2. Worms feed on mould, detritus and death.  Remnant spaces, recyclable materials and remediation are critical for their success.

At his now-famous graduation speech to Stanford University students, Steve Jobs, the preeminent creative entrepreneur of our time, shared a story of his near-death experience with pancreatic cancer.  His suggested that "Death is very likely the single best invention of Life. It is Life’s change agent. It clears out the old to make way for the new." Jobs ended his speech with the Whole Earth Catalog refrain "Stay Hungry" which puts worm logic in a beautifully constructive, creative and curious context.

There is, of course, a techno-literal meaning for worms (and viruses) as they relate to Internet media and communications.  Bruce Schneier, the Internet’s best critic of cryptography and security, forecast the following worm reality for 2005:

In 2005, we expect to see ever-more-complex worms and viruses in the wild, incorporating complex behavior: polymorphic worms, metamorphic worms, and worms that make use of entry-point obscuration. For example, SpyBot.KEG is a sophisticated vulnerability assessment worm that reports discovered vulnerabilities back to the author via IRC channels.  We expect to see more blended threats: exploit code that combines malicious code with vulnerabilities in order to launch an attack. We expect Microsoft’s IIS (Internet Information Services) Web server to continue to be an attractive target. As more and more companies migrate to Windows 2003 and IIS 6, however, we expect attacks against IIS to decrease.  We also expect to see peer-to-peer networking as a vector to launch viruses.

Tb_free_worms_1Targeted worms are another trend we’re starting to see. Recently there have been worms that use third-party information-gathering techniques, such as Google, for advanced reconnaissance. This leads to a more intelligent propagation methodology; instead of propagating scattershot, these worms are focusing on specific targets. By identifying targets through third-party information gathering, the worms reduce the noise they would normally make when randomly selecting targets, thus increasing the window of opportunity between release and first detection.

Even though Schneier is referring specifically computer security, his comments are useful for our conversation about Media Futures.  The “window of opportunity” that he identifies "between release and first detection" applies equally well to the creation of new media applications and the attention management tools that they enable.  Once new applications have been “discovered,” just like that of any wide spread, they are likely already in the process of deteriorating.

*

Over the past month, I have been reading my boys Norton Juster’s classic, The Phantom Tollbooth.  In a chapter entitled “The Word Market,” Juster sets the ambiance of a bazaar of fresh fruit and exotic delicacies, but where instead of food there are words.  Suddenly, a merchant cries out: “Juicy, tempting words for sale.”  My six year-old loves this part; he appreciates words’ unique ability to convey different shades of meaning.  Every new word he learns is another tool he can use to establish control over his environment.  He wants to take each new word and wield it like a light saber of intention.

This weekend maybe I will sit down with him outside, on the grass, dig into the soil with my hand and pick up a worm.  “Do you remember that scene from Phantom Tollbooth, where they are selling words?  Well, when the words go stale and nobody wants them, do you know what happens to them?”  I am not sure how he will respond.  But I will take the worm, put it in his hand, and say  "The worms eat the words.”  And he will probably look at me like I am joking and being the smartie that he is, will ask “And what do the worms do with them?”  And I’ll tell him frankly “Why, the worms feed the words to Google.”  And he will laugh, and I will laugh. 

But I wont be kidding

Media Futures, Part 5/5: ARBITRAGE: IV. New Markets

31 May

Securitization is a financial technique that pools assets together and, in effect, turns them into a tradeable security. Financial institutions and businesses of all kinds use securitization to immediately realize the value of a cash-producing asset. Securitization has evolved from its beginnings in the 1970s to a total aggregate outstanding (as of the second quarter of 2003) estimated to be $6.6 trillion. This technique comes under the umbrella of structured finance. (from Wikipedia)

Tb_market_1_1In the 1970s, from his perch at the Salomon Brothers trading desk, Lew Ranieri famously applied securitization to the mortgage market, creating what is now referred to as MBOs (mortgage backed securities).  This application has enabled (1) millions of consumers to more easily become homeowners by (2) transferring credit risk away from banks and thrifts to independent financial investors in the bond markets.  To put the size of this market- $2.5 trillion- into perspective, you could take the combined market cap of the entire Internet sector (including paid search, ecommerce, advertising, travel, etc):

  • TWX = $90B
  • MSFT= $250B
  • GOOG= $65B
  • YHOO= $50B
  • IACI= $15B
  • AMZN= $15B
  • EBAY= $50B
  • Combined Internet market cap= $600B

The innovation and size of the MBO market qualifies Ranieri as a special blend of creativity and capitalism, and this led to his becoming one of the great financial alchemists of all time.

Business Week, November 29, 2004   
Lewis S. Ranieri: Your Mortgage Was His Bond
The bond trader turned home loans into tradable securities 

The past quarter-century has seen a revolution in finance. It’s felt every time a homeowner refinances a mortgage or signs up for a credit card. No one person can claim to have lit the fuse for this revolution– but Lewis S. Ranieri was holding the match. Joining Salomon Brothers’ new mortgage-trading desk in the late 1970s, the college dropout became the father of "securitization," a word he coined for converting home loans into bonds that could be sold anywhere in the world. What Ranieri calls "the alchemy" lifted financial constraints on the American dream, created a template for cutting costs on everything from credit cards to Third World debt — and launched a multibillion-dollar industry.

Last month, online mortgage lead generation company LowerMyBills (LMB) was bought for more than $300m by Experian.  According to the press release, here is how the two companies are described:

LowerMyBills.com is a one-stop destination that offers savings through relationships with more than 400 service providers across 17 service categories including home loans, credit cards, long-distance and wireless services, and auto and health insurance. Since its inception in 1999, LowerMyBills.com has helped more than 500,000 consumers save nearly $200 million.

Experian is a global leader in providing information solutions to organizations and consumers. It helps organizations find, develop and manage profitable customer relationships by providing information, decision-making solutions and processing services. It empowers consumers to understand, manage and protect their personal information and assets. Experian works with more than 50,000 clients across diverse industries, including financial services, telecommunications, health care, insurance, retail and catalog, automotive, manufacturing, leisure, utilities, e-commerce, property and government. Experian is a subsidiary of GUS plc and has headquarters in Nottingham, UK, and Costa Mesa, Calif. Its 12,000 people in 27 countries support clients in more than 60 countries. Annual sales exceed $2.5 billion.

This is interesting on a number of levels, not the least of which is the premise that (1) the mortgage leads and data process of LMB are valuable to an information broker such as Experian and not simply to traditional mortgage companies and (2) the consumer benefits from easy access to creditors who bid in a competitive environment for the consumer’s business.

The essence of securitizing mortgages was to shift the credit risk away from the lenders’ balance sheets and into a open market.  Whereas before, the complexity and regulatory requirements of banks meant that getting approved for a loan might take months, now the determination of credit worthiness was established by a far more efficient marketplace where investors in the business of taking such risks were able to establish a price for this risk quickly and provide consumers with a rate in a matter of weeks (which has become days, hours and increasingly seconds).  Consumers benefit greatly because they are much more in control of their financial futures and not at the mercy of institutions with conflicting priorities. 

I only have a passing understanding of the nuances of the modern bond market but I am looking forward to seeing the Internet evolve into the multi-trillion dollar market that structured finance has become.  Many markets have emerged online in the past 10 years where buyers meet sellers, consumers meet advertisers, and advertisers meet publishers in low-friction, value-added environments.   

Using Chris Anderson’s framework, as one moves down the tail by searching for ever more obscure (ie "un-covered") keywords, one inevitably finds companies like Nextag, Amazon and eBay/Shopping.com as the minimum bidders.  They believe that they have enough liquidity of product opportunities so as to be able to convert any cheap click (ie $.05) into a more qualified activity within their network.  In so far as Amazon sells actual products, its role is as much marketer as anything else.  eBay sells other people’s products and so is one step removed from Amazon (which of course also sells other people’s products through its marketplace).  Nextag and Shopping.com don’t sell anything, but are simply better engines for comparing products and finding the best prices.  Shopping.com is doing more than $100m in annual sales off of these and other techniques leading to their recent acquisition by eBay, while Nextag remains private but purports to be doing just as much revenue.

As we move further beneath the radar, there is another group of companies, mostly emerging from the online direct response agency world, that are generating significant profits by purchasing media, attracting prospects and selling leads to advertisers.  Four companies in particular stand out as the leaders in this space:  Adteractive, Azoogleads, Quin Street and NetBlue.  Together they will generate more than $500 million in 2005 sales with 30%+ profitability.  Yes, $500m.  Adteractive recently sold a minority share for more than $100m to a prestigious private equity firm.  In the next few months one of these will likely be bought or merged with another on the way to one of these going public in early 2006.

While the majority of Internet advertising is paid for on a CPM or CPC basis, the real driver of spending is advertisers’ willingness to pay on a pure Cost Per Lead (CPL), performance basis.  Remember the hand-wringing in 1999, for example, as to the efficacy of online advertising?  Strange isn’t it how we don’t hear much about that anymore. The emergence of pay-for-performance advertising online has effectively transferred the risk away from the medium.  With PPC, Internet media no longer has to convince advertisers to trust its ability to perform as effectively as other media (Cable, TV, Radio, Print…).  The quality of the commercial transaction is self-evident to the online advertiser, who now inherits all the risk from the publishers. 

Just to be clear, the fact that the risk now resides with the advertiser and not the publisher does not a pure market make.  Advertisers are companies in the business of selling things to consumers and other companies.  Their business is not buying advertising. 

Tiny (Internet) Markets

Within these new markets, there are millions of micro markets where a query or a unique user path comes into contact with one of more targeted advertisements.  A constructive tension emerges between the user who intends to find something or do something, and the sponsor of the link who is trying to lure her into their particular commercial environment.  Each one of these tiny interactions feature a buyer (advertiser), seller (publisher) and asset (consumer’s att/intention).

Tb_free_trust_2The latest Release 1.0 article on Spyware features a fable that imagines advertisers as merchants at a Bazaar and their various adware proxies as pushy street urchins, “Miss!  Miss! Look here!  Special deal!."   Efficient markets are based on trust.  This relates to markets of any scale, from the NYSE and eBay to my decision whether or not to accept an invitation into somebody else’s LinkedIn network.   

While the modern US interpretation of the Bazaar has been typically pejorative (with a few notable exceptions), there is nonetheless a very useful economic system for transferring value that has emerged in around the Bazaar, namely Hawala.   Hawala is a peer-to-peer payment system that enables any participant to make a decision as to any other participant’s credit worthiness:

The unique feature of the system is that no promissory instruments are exchanged between the hawala brokers; the transaction takes place
entirely on the honor system. (From Wikipedia)

It is unfortunate that Hawala got associated with the terrorist activities of 9/11, since as a structural mechanism it has much to offer us as a model for enabling the liquidity of attention markets that Media Futures require.  It takes courage to create new markets, but in so far as new markets establish new currencies of trust and individual control, then they are well worth the risk.

*

Note:  This is an abridged post.
Transparency finds its limits in posts about arbitrage.  While there is likely long term
benefit in an open exchange of intellectual property, specifically
around the collective invention of an attention marketplace,  the fact remains
that capital is usually created by the introduction of friction and
opacity onto otherwise smooth, transparent surfaces.  So long as I continue to debate the benefits of openness vs the importance of discretion, I will continue to hold certain things back.  In this series on Media Futures,  I have used all sorts of
"A" words to articulate how media
operates on the Internet in 2005.  I am looking forward to synthesizing the Media
Futures series into a book, which will include much that is now only in note form or else is too sensitive to share at this juncture..

Finally, all comments here reflect my
personal opinions and not those of any firm or organization I am associated with.  Specifically, I am proud of what our team has accomplished at Majestic Research in terms
of reinventing investment research in a rigorous, unbiased and
real-time fashion.  Majestic’s insights are driven entirely by data,
carefully interpreted by smart quantitive analysts.  When I
comment on this blog about any public or private company, such comments are entirely distinct from the investment research that
Majestic provides to its clients. 

Media Futures, Part 5/5: ARBITRAGE: IV. New Markets

31 May

Securitization is a financial technique that pools assets together and, in effect, turns them into a tradeable security. Financial institutions and businesses of all kinds use securitization to immediately realize the value of a cash-producing asset. Securitization has evolved from its beginnings in the 1970s to a total aggregate outstanding (as of the second quarter of 2003) estimated to be $6.6 trillion. This technique comes under the umbrella of structured finance. (from Wikipedia)

Tb_market_1_1In the 1970s, from his perch at the Salomon Brothers trading desk, Lew Ranieri famously applied securitization to the mortgage market, creating what is now referred to as MBOs (mortgage backed securities).  This application has enabled (1) millions of consumers to more easily become homeowners by (2) transferring credit risk away from banks and thrifts to independent financial investors in the bond markets.  To put the size of this market- $2.5 trillion- into perspective, you could take the combined market cap of the entire Internet sector (including paid search, ecommerce, advertising, travel, etc):

  • TWX = $90B
  • MSFT= $250B
  • GOOG= $65B
  • YHOO= $50B
  • IACI= $15B
  • AMZN= $15B
  • EBAY= $50B
  • Combined Internet market cap= $600B

The innovation and size of the MBO market qualifies Ranieri as a special blend of creativity and capitalism, and this led to his becoming one of the great financial alchemists of all time.

Business Week, November 29, 2004   
Lewis S. Ranieri: Your Mortgage Was His Bond
The bond trader turned home loans into tradable securities 

The past quarter-century has seen a revolution in finance. It’s felt every time a homeowner refinances a mortgage or signs up for a credit card. No one person can claim to have lit the fuse for this revolution– but Lewis S. Ranieri was holding the match. Joining Salomon Brothers’ new mortgage-trading desk in the late 1970s, the college dropout became the father of "securitization," a word he coined for converting home loans into bonds that could be sold anywhere in the world. What Ranieri calls "the alchemy" lifted financial constraints on the American dream, created a template for cutting costs on everything from credit cards to Third World debt — and launched a multibillion-dollar industry.

Last month, online mortgage lead generation company LowerMyBills (LMB) was bought for more than $300m by Experian.  According to the press release, here is how the two companies are described:

LowerMyBills.com is a one-stop destination that offers savings through relationships with more than 400 service providers across 17 service categories including home loans, credit cards, long-distance and wireless services, and auto and health insurance. Since its inception in 1999, LowerMyBills.com has helped more than 500,000 consumers save nearly $200 million.

Experian is a global leader in providing information solutions to organizations and consumers. It helps organizations find, develop and manage profitable customer relationships by providing information, decision-making solutions and processing services. It empowers consumers to understand, manage and protect their personal information and assets. Experian works with more than 50,000 clients across diverse industries, including financial services, telecommunications, health care, insurance, retail and catalog, automotive, manufacturing, leisure, utilities, e-commerce, property and government. Experian is a subsidiary of GUS plc and has headquarters in Nottingham, UK, and Costa Mesa, Calif. Its 12,000 people in 27 countries support clients in more than 60 countries. Annual sales exceed $2.5 billion.

This is interesting on a number of levels, not the least of which is the premise that (1) the mortgage leads and data process of LMB are valuable to an information broker such as Experian and not simply to traditional mortgage companies and (2) the consumer benefits from easy access to creditors who bid in a competitive environment for the consumer’s business.

The essence of securitizing mortgages was to shift the credit risk away from the lenders’ balance sheets and into a open market.  Whereas before, the complexity and regulatory requirements of banks meant that getting approved for a loan might take months, now the determination of credit worthiness was established by a far more efficient marketplace where investors in the business of taking such risks were able to establish a price for this risk quickly and provide consumers with a rate in a matter of weeks (which has become days, hours and increasingly seconds).  Consumers benefit greatly because they are much more in control of their financial futures and not at the mercy of institutions with conflicting priorities. 

I only have a passing understanding of the nuances of the modern bond market but I am looking forward to seeing the Internet evolve into the multi-trillion dollar market that structured finance has become.  Many markets have emerged online in the past 10 years where buyers meet sellers, consumers meet advertisers, and advertisers meet publishers in low-friction, value-added environments.   

Using Chris Anderson’s framework, as one moves down the tail by searching for ever more obscure (ie "un-covered") keywords, one inevitably finds companies like Nextag, Amazon and eBay/Shopping.com as the minimum bidders.  They believe that they have enough liquidity of product opportunities so as to be able to convert any cheap click (ie $.05) into a more qualified activity within their network.  In so far as Amazon sells actual products, its role is as much marketer as anything else.  eBay sells other people’s products and so is one step removed from Amazon (which of course also sells other people’s products through its marketplace).  Nextag and Shopping.com don’t sell anything, but are simply better engines for comparing products and finding the best prices.  Shopping.com is doing more than $100m in annual sales off of these and other techniques leading to their recent acquisition by eBay, while Nextag remains private but purports to be doing just as much revenue.

As we move further beneath the radar, there is another group of companies, mostly emerging from the online direct response agency world, that are generating significant profits by purchasing media, attracting prospects and selling leads to advertisers.  Four companies in particular stand out as the leaders in this space:  Adteractive, Azoogleads, Quin Street and NetBlue.  Together they will generate more than $500 million in 2005 sales with 30%+ profitability.  Yes, $500m.  Adteractive recently sold a minority share for more than $100m to a prestigious private equity firm.  In the next few months one of these will likely be bought or merged with another on the way to one of these going public in early 2006.

While the majority of Internet advertising is paid for on a CPM or CPC basis, the real driver of spending is advertisers’ willingness to pay on a pure Cost Per Lead (CPL), performance basis.  Remember the hand-wringing in 1999, for example, as to the efficacy of online advertising?  Strange isn’t it how we don’t hear much about that anymore. The emergence of pay-for-performance advertising online has effectively transferred the risk away from the medium.  With PPC, Internet media no longer has to convince advertisers to trust its ability to perform as effectively as other media (Cable, TV, Radio, Print…).  The quality of the commercial transaction is self-evident to the online advertiser, who now inherits all the risk from the publishers. 

Just to be clear, the fact that the risk now resides with the advertiser and not the publisher does not a pure market make.  Advertisers are companies in the business of selling things to consumers and other companies.  Their business is not buying advertising. 

Tiny (Internet) Markets

Within these new markets, there are millions of micro markets where a query or a unique user path comes into contact with one of more targeted advertisements.  A constructive tension emerges between the user who intends to find something or do something, and the sponsor of the link who is trying to lure her into their particular commercial environment.  Each one of these tiny interactions feature a buyer (advertiser), seller (publisher) and asset (consumer’s att/intention).

Tb_free_trust_2The latest Release 1.0 article on Spyware features a fable that imagines advertisers as merchants at a Bazaar and their various adware proxies as pushy street urchins, “Miss!  Miss! Look here!  Special deal!."   Efficient markets are based on trust.  This relates to markets of any scale, from the NYSE and eBay to my decision whether or not to accept an invitation into somebody else’s LinkedIn network.   

While the modern US interpretation of the Bazaar has been typically pejorative (with a few notable exceptions), there is nonetheless a very useful economic system for transferring value that has emerged in around the Bazaar, namely Hawala.   Hawala is a peer-to-peer payment system that enables any participant to make a decision as to any other participant’s credit worthiness:

The unique feature of the system is that no promissory instruments are exchanged between the hawala brokers; the transaction takes place
entirely on the honor system. (From Wikipedia)

It is unfortunate that Hawala got associated with the terrorist activities of 9/11, since as a structural mechanism it has much to offer us as a model for enabling the liquidity of attention markets that Media Futures require.  It takes courage to create new markets, but in so far as new markets establish new currencies of trust and individual control, then they are well worth the risk.

*

Note:  This is an abridged post.
Transparency finds its limits in posts about arbitrage.  While there is likely long term
benefit in an open exchange of intellectual property, specifically
around the collective invention of an attention marketplace,  the fact remains
that capital is usually created by the introduction of friction and
opacity onto otherwise smooth, transparent surfaces.  So long as I continue to debate the benefits of openness vs the importance of discretion, I will continue to hold certain things back.  In this series on Media Futures,  I have used all sorts of
"A" words to articulate how media
operates on the Internet in 2005.  I am looking forward to synthesizing the Media
Futures series into a book, which will include much that is now only in note form or else is too sensitive to share at this juncture..

Finally, all comments here reflect my
personal opinions and not those of any firm or organization I am associated with.  Specifically, I am proud of what our team has accomplished at Majestic Research in terms
of reinventing investment research in a rigorous, unbiased and
real-time fashion.  Majestic’s insights are driven entirely by data,
carefully interpreted by smart quantitive analysts.  When I
comment on this blog about any public or private company, such comments are entirely distinct from the investment research that
Majestic provides to its clients. 

Media Futures, Part 5/5: ARBITRAGE: III. Attention

17 May

ATTENTION-BACKED SECURITIES

Want an iPod? Get one free at freeiPods.com

I hate sounding like a crass web promoter but FREE remains the best single response mechanism on the Internet.  We are happy to provide our full attention in exchange for free stuff: iPods, Razrs, Flatscreens, PSP, and more.  And it really works, as people actually do end up with iPods which are free in terms of money but expensive in terms of attention.

Attention_1It is easy to dismiss the random college student who has nothing better to do with his time than click away on offers he isn’t really interested and sell out his five other college friends as potential online education and auto loan applicants.  It’s similarly easy to dismiss the stretched dad who eagerly clicks on low cost mortgage ads even though he has already borrowed 200% of his income on credit credit cards and usually pays 100% annualized interest on cash advance services to service his debt.  It is scary when you consider how much the Internet advertising economy depends on juicing up consumer credit; as JK suggests at his excellent blog, more than 20% of Google and Yahoo search ad revenue may be dependant on mortgages.  Our research at Majestic suggests that the top paying keywords on paid search have consistently been Home Equity Loan and Refinance purchased by Countrywide and ELoan for over $20 per click.

An enterprising consumer could fabricate her identity and that of her referrals in order to try qualifying for products without ever being contacted again.  But that’s not what happens.  The great majority of America does not subscribe to RSS feeds or use Firefox.  These Americans think a tag sale is a great way to spend a Saturday afternoon, not the next revolution in Internet advertising.

Tagsale_2We are an American populus of lazy attention providers who opt in to
elaborate network marketing schemes that resell us multiple times over
and append increasing data about our demographics and purchase
intentions. We would rather not bother
with
multiple email identities with unique passwords; life is too short.

Spitzer may indeed go after freeipod.com once he is done with Intermix.  Consumers who have filled in a lot of data and have yet to see their free iPods arrive in the mail will cry foul.  In the same way that some retail investors cried foul to the Attorney General after losing their 401k money on Internet Capital Group or Infospace.  Mayor Bloomberg was right when he said that people make their own investment decisions and should be held responsible for any losses they incur. 

I wonder if he will say the same thing when consumers begin the witch hunt against any Internet advertising company that sells their attention to advertisers without their explicit permission each step of the way.  The individual’s decision to save time and money in exchange for their passive attention represents our collective failure to imagine a more active Internet lifestyle.  This should come as no surprise in the context of our dependencies on credit, oil, porn, sugar, and gambling.  These industries are not in danger of collapsing anytime soon.

It is ironic how personal technology and the Internet continues to be represented culturally as a source of control; we are everywhere reminded that our browser gives us the ability to establish order on a world of constantly changing information.  When we search for something, we are driving the process of personalized information retrieval

But on the other side of the mirror, we are being watched.  Our queries are being mapped legitimately by companies looking to contact us.  If you are not careful, an errant click will be answered with a telephone call from a sales representative.  And so as we succumb to these performance-based networks, our future purchases, our future media consumption, our lifetime economic value across hundreds of categories and thousands of companies, are all being calculated in real-time.  Not by a single agent, but by multiple agents each trying to evaluate our momentary state of purchase intent in the context of the many monetization levers these advertisers have at their disposal. 

As the Internet medium continues to evolve into a sales channel, the price of advertising is becoming mapped algorithmically to probable outcomes.  Very little is being left to chance, as even the most ephemeral of creative decisions (color of the car in the banner, the choice of text in the link) are immediately evaluated in terms of click-thru rate and ultimate conversion.  As Josh Kopelman, who used the prototypical arbitrage concept of “half” to create a $300m exit for his company half.com to EBay, puts it, “online advertising is just math."

Media Futures, Part 5/5: ARBITRAGE: III. Attention

17 May

ATTENTION-BACKED SECURITIES

Want an iPod? Get one free at freeiPods.com

I hate sounding like a crass web promoter but FREE remains the best single response mechanism on the Internet.  We are happy to provide our full attention in exchange for free stuff: iPods, Razrs, Flatscreens, PSP, and more.  And it really works, as people actually do end up with iPods which are free in terms of money but expensive in terms of attention.

Attention_1It is easy to dismiss the random college student who has nothing better to do with his time than click away on offers he isn’t really interested and sell out his five other college friends as potential online education and auto loan applicants.  It’s similarly easy to dismiss the stretched dad who eagerly clicks on low cost mortgage ads even though he has already borrowed 200% of his income on credit credit cards and usually pays 100% annualized interest on cash advance services to service his debt.  It is scary when you consider how much the Internet advertising economy depends on juicing up consumer credit; as JK suggests at his excellent blog, more than 20% of Google and Yahoo search ad revenue may be dependant on mortgages.  Our research at Majestic suggests that the top paying keywords on paid search have consistently been Home Equity Loan and Refinance purchased by Countrywide and ELoan for over $20 per click.

An enterprising consumer could fabricate her identity and that of her referrals in order to try qualifying for products without ever being contacted again.  But that’s not what happens.  The great majority of America does not subscribe to RSS feeds or use Firefox.  These Americans think a tag sale is a great way to spend a Saturday afternoon, not the next revolution in Internet advertising.

Tagsale_2We are an American populus of lazy attention providers who opt in to
elaborate network marketing schemes that resell us multiple times over
and append increasing data about our demographics and purchase
intentions. We would rather not bother
with
multiple email identities with unique passwords; life is too short.

Spitzer may indeed go after freeipod.com once he is done with Intermix.  Consumers who have filled in a lot of data and have yet to see their free iPods arrive in the mail will cry foul.  In the same way that some retail investors cried foul to the Attorney General after losing their 401k money on Internet Capital Group or Infospace.  Mayor Bloomberg was right when he said that people make their own investment decisions and should be held responsible for any losses they incur. 

I wonder if he will say the same thing when consumers begin the witch hunt against any Internet advertising company that sells their attention to advertisers without their explicit permission each step of the way.  The individual’s decision to save time and money in exchange for their passive attention represents our collective failure to imagine a more active Internet lifestyle.  This should come as no surprise in the context of our dependencies on credit, oil, porn, sugar, and gambling.  These industries are not in danger of collapsing anytime soon.

It is ironic how personal technology and the Internet continues to be represented culturally as a source of control; we are everywhere reminded that our browser gives us the ability to establish order on a world of constantly changing information.  When we search for something, we are driving the process of personalized information retrieval

But on the other side of the mirror, we are being watched.  Our queries are being mapped legitimately by companies looking to contact us.  If you are not careful, an errant click will be answered with a telephone call from a sales representative.  And so as we succumb to these performance-based networks, our future purchases, our future media consumption, our lifetime economic value across hundreds of categories and thousands of companies, are all being calculated in real-time.  Not by a single agent, but by multiple agents each trying to evaluate our momentary state of purchase intent in the context of the many monetization levers these advertisers have at their disposal. 

As the Internet medium continues to evolve into a sales channel, the price of advertising is becoming mapped algorithmically to probable outcomes.  Very little is being left to chance, as even the most ephemeral of creative decisions (color of the car in the banner, the choice of text in the link) are immediately evaluated in terms of click-thru rate and ultimate conversion.  As Josh Kopelman, who used the prototypical arbitrage concept of “half” to create a $300m exit for his company half.com to EBay, puts it, “online advertising is just math."

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