Internet Advertising: A Bum Rap

I just read an article over at Business Week. I really enjoyed the analysis about Twitter's tough position to create revenues (most likely through advertising), but I have a serious issue with the author's attitude and valuation of ads served through a website.

Here is an excerpt of his methodology:

A simple way to calculate how much money advertisers would spend on Twitter ads is to ask, how much profit will advertisers get back? We arrived at our own figure using the following analysis:

A. Assume each of Twitter's 2.3 million users sees 10 ads each day. Twitter could thus serve 23 million ad "impressions"—a banner ad appearing on a Web page—each day.

B. For Internet banner ads, the average click-through rate is 0.14%. So Twitter's 23 million banner ad impressions would generate, at a 0.14% response, 32,200 users who click on the ad.

C. Clicking on a banner ad takes a user to the advertiser's site. Only about 8% of consumers who visit such a site continue further, turning 32,200 clicks into 2,576 serious shoppers.

D. And of course, not every shopper at a Web site buys. If 30% of shoppers actually ended up buying the product or service sold, Twitter ads would generate 772 sales a day.

E. Finally, let's assume each sale generates $100 in profit. Thus, 772 sales would create $77,200 in profit each day for advertisers—or (times 365) about $28.2 million in profit per year.

Advertisers would find Twitter ads generate $28.2 million in profits. So the maximum they logically would spend on such ads is $28.2 million.

My issue isn't with his math. From my research he's pretty close with the click through rates. My issue is that he's committing the same mistake that most traditional media make when passing judgment on ads served on the internet. The mistake they make is holding net ads to an unrealistically high standard.

Let's think about this closely - his analysis makes us believe that every single advertisement placed on a website should ultimately result in a sale. That's always the goal of advertising, but as any marketer who doesn't live in Candy Land knows, it's certainly not the real world reality. If TV, print or billboard ads were held to the same standard I'd bet that their numbers would look very similar to those on the net, if not worse. Let's face it, not everyone who watches a Lexus ad buys one. Some people don't need a car at that given time, some people can't afford a Lexus, some luxury buyers would rather have a Benz - the point is that advertising is mix of message, audience and timing.

Message
The first ads on the internet focused on catching attention - they blinked or moved and were often the only action on lifeless text-filled pages. Instead of carrying information within the ad that the user could recall at a later date, marketers focused on getting the user to click on the banner to get them to their website. After all - that's where the sale is made. The problem with this mentality is that if the user doesn't feel like leaving the site they are browsing, or like many people, is afraid of the spyware and other forms of computer AIDS they might catch from seizure inducing ads, the advertiser gets no value. They have provided no product information or compelling message to the consumer that he can utilize or recall when he IS ready to make a purchase. When people think running shoes they think Nike, when they think cola they think Coca Cola. They don't buy a Coke every time they see a TV ad or a billboard with the company's ads, but the constant messaging over years makes these brands top of mind at the point and time of purchase.

Most internet advertisers are missing a bigger point - part of advertising is establishing your brand and messaging so that the consumer can use it later, not trying to get them to make impulse purchases. This is a tough pill for the bean counters to swallow because the numbers don't work out quite so elegantly as in the example above, but it's sadly a more accurate picture of how advertising works. After all, the human mind isn't elegant and it certainly isn't simple.

Audience
Google is generally lauded for its text ad system. After all, it brought internet advertising within reach for millions of small businesses - especially local ones. Sadly, most people forget to give Facebook credit for the inroads they are slowly making in the hyper-local advertising space. I thought it was brilliant when FB began toying with user-posted geo-targeted ads. I'm seeing more and more local companies, bars, promotions and events being advertised on Facebook and I'm actually finding myself clicking on them - that's right, I'm clicking on banner ads. But why?? Because they're RELEVANT to me. I didn't know Oasis was coming to my city until I saw the ad for the concert on Facebook. I didn't buy a ticket right away from the site, but I'm certainly planning on it in the near future. The model above would call this a failure for the advertiser, I call it an unqualified success. The right message got to exactly the right person (I have rock listed in my favorite music) in the right place. Most ads on the net however, even on Google text ads, are becoming a sea of scams, get rich quick schemes and other assorted trash. Most of the ads just aren't relevant and don't carry a message I can remember for later. If Twitter implemented a similar hyper-local ad service I think the resistance from users would be minimal - ads can be a real asset when they're relevant. The challenge is to resist the urge to make a quick buck by plastering your site with spazzy banner ads telling me I'm a winner.

Timing
This aspect is the toughest part of advertising and it definitely hurts the most. It hurts because if you do a great job creating a compelling message and you actually target your ad to the right person they still might not buy. But why? My ad was genius and this person is in the exact demographic and region for my products... The sad fact is that not everyone needs a particular product at a specific time. Seeing a great car ad for a vehicle that would perfectly suit you doesn't mean you're going to sell your 5 month old BMW for a Lexus. Again, the model above calls this a failure. I don't think it's so simple. That person will need a new car eventually, and if Lexus does a good job with the message and the audience aspect of their marketing push, when the timing is right the consumer will put that message into action.

I'm not saying that one of the goals of net advertising should not be to create immediate purchases - it very well should. But this goal should be more of a benefit or perk than the modus operandi. After all, people can't buy shoes through their TV (yet), or rip a bottle of Jack Daniels from the pages of GQ magazine. Internet ads can have the dual benefit of exposure and direct results - few if any other ad media can claim both.

I suggest that advertisers need to learn more about combining the three aspects of advertising and doing a better job on the message and audience so that when the time is right consumers make the only choice they should.

Let's all be a little more forgiving of the new kid on the block - he might not put every other ad media out of business, but he's definitely got some cards left up his sleeve.

Why patents will ruin the world

I've just finished reading that Gibson has extended its lawsuit against Activision to include Harmonix, MTV and the retailers that sell the game Guitar Hero. The patent in question is for "equipment to simulate a musical performance." Now this just makes me want to vomit. Patents were created so that innovation could flourish. Patents are meant to provide an inventor with an artificial monopoly in exchange for sharing his/her idea with the general public so that everyone will benefit and the creator will reap the rewards of his ingenuity. So where did this all go wrong?

The problem with patents today is that they're mostly mundane and trivial garbage. The patent system is rife with abuse, overrun with mountains of applications (sometimes causing two patents to be awarded for essentially the same thing) and full of speculators and campers who buy or file applications with the sole intent of sitting on them or suing large corporations who will inevitably create something similar. The recent suit against Research in Motion is case in point. The creator of the extremely popular Blackberry data phone was successfully sued for a wireless email patent infringement by a small company who specializes in buying existing patents, then suing large companies who are infringing upon them. Clearly this is not in the spirit in which the system was created and is a sad testament to the litigious nature of American society.

The video games industry has not been spared from this abuse. Patent filings from game developers and publishers have exploded over the past 10 years and show no signs of slowing down. This trend is stifling the innovative nature of the games industry as small developers fear stepping on the toes of larger competitors. Here's an example. Sega has a patent on using "ghost" opponents in a racing game. These are semi-transparent cars that can overlap with the player while he drives the track. If any other company ever wants to use this type of feature in a game they will be subject to licensing fees and possibly penalties. How does this help the game industry? How does this stimulate innovation? Clearly something is wrong with the status quo.

I believe in the value of the patent system, but its current state is far from its intended vision. Today patents aren't filed for monumental achievements like radio or the alternating current motor. They are filed for mundane enhancements to consumer products and even the very human genome. It's a perversion that cannot last.

One thing I don't get about Sony

Sony is getting a lot of flack over the PS3. Some of it is deserved - it took a long time to release, it was un-godly expensive when it was first released, it lacks great exclusive content (there is speculation that this is because it is very hard to develop for), and many disagree about the need for blu-ray format games. I like Sony. I like Playstation - I don't own a PS3, but with a $350.00 model available and great upcoming content, I'm now in the market for one.

With that said, I do have a serious question for Sony that makes me shake my head at times. You make high end gaming equipment, and you make the HD TV's that display the games... I see a massive opportunity for synergy here. Why create a high end LCD/Plasma with a PS3 integrated into the TV? To me that would make an expensive gaming "toy" into a an attractive value proposition for someone making an "investment" in an HD television.

Bundling the technologies in this fashion completely changes the dynamics of the purchase in the consumer's mind.

Status Quo:

1. I have a TV which may or may not be HD.
2. I see and want the PS3
3. I make a decision as to whether I want to spend $700 on a toy...hmm I think I'll pass and pick up the 360.

Integration:

1. I'm in the market for a new HD TV (which most people either are or will be in the near future)
2. I go into a big box store and look around - there are a lot of options and I'm probably going to do research online or ask a sales rep. Both are probably going to tell me that if I'm getting an HD TV, I'll probably want (and in the future will need) a blue-ray DVD player. The Sony TV actually has one built right in for a fraction of the cost of a stand-alone blue ray player. Great VALUE.
3. Many people (especially younger people with little money) are going to finance that new HD TV - because a TV is easier to rationalize as an investment, not a toy. Adding even $700 to the price tag a of a big ticket item like a TV makes only a $20-$30 per month difference in the purchaser's monthly payment. Seems like a small price to pay for a blu-ray player (which you'll need some day) and a PS3, (which the kids/I would like).
4. I go with the Sony that has the PS3 add-on because it provides me with the most value for my money - this could even swing me away from buying a competing HD TV.
   
5. I'm not making my decision based on the PS3 vs. other game consoles - I'm making it based on the super TV vs other TV's. Therefore I'm not as worried that the 360 has a much better selection of games, has better online gaming and is cheaper - because I'm not directly comparing the two any more.
   

The clear difference between the two scenarios is that in the first one, you're asking a consumer to make a splurge purchase on an expensive toy. Not only that, you're asking them to spend a ton on the hardware, let alone the fact that they have to drop more cash on the games, an extra controller, etc. Even if you tell them that you get a wireless media center and blu-ray player on the cheap, in the end it's still a toy. In scenario two, you've got a customer that's already expecting to spend a lot of money. These people do research and ask store employees to find out which purchase offers them the most value. Instead of buying a TV, then having to drop cash on a PS3, you're getting the TV that does it all at a much lower price than buying a TV and a blu-ray player alone. People love getting a deal, and at any cost higher than it's competitors, especially the launch price of $700 the PS3 is far from breaking down the mental purchasing barrier. I'm not saying that Sony should stop making stand-alone PS3's, or that an integrated system would magically change their fortunes, but if they did create an integrated solution it would certainly help to drive adoption of the PS3, the blu-ray format and their TV's.

Tutorial Videos - Because Users are Stupid...

LAUNCH DAY!!!!!

It's like Christmas, your birthday and the first time you.... well.... you know... all rolled into one!

For me today represents two and a half years of blood, sweat and tears. We've literally been around the world to get this site online. We started from a few scraps of paper in a Montreal coffee shop and have grown our concept to be one of the most complex systems on the web today. We still have work to do to prove that, but that will come in good time. We've heard a million no's, you're crazy's, and even had a person fall asleep in an investment meeting lol. But we're finally here. Finally ready to show everyone what we've been doing - where we've been hiding.

We would not be here today without the friends and family who have supported, encouraged and guided us over the past few years. Francisco and I are so fortunate to have networks full of people who believe, not only in us, but in the boundless possibilities life holds. Their positivity and wisdom have given us strength in our darkest times when all hope seemed lost, and the fortitude to be brave when times got tough. You all know who you are. Thank you.

Even though we've come a long way the journey has really just begun. The hardest parts yet lie ahead - survival and large scale funding. The vast majority of tech companies, no matter how brilliantly conceived, fail. We need to be able to grow fast while providing great service and rolling out new products at breakneck speed. We need to connect with our audience and make them believe in and buy into our brand. We need to prove to investors that our lack of world experience is more than compensated by our passion for our market and our absolute resolution to succeed regardless of personal cost.

It's going to be extremely hard. Difficult decisions will have to be made and priorities set every day. Creative solutions will need to be found to insurmountable problems. Constant learning will need to be done on an ongoing basis. New relationships will need to be forged and old bonds strengthened.

This is tough, risky and taxing. I love it.

Slave Labour (in American that's spelled "Slave Labor")

The great empires of the world have all been been built on the backs of slaves. I'm not going to argue the morality of that, but rather speak about how it applies to business, because large corporations are the empires of the modern age. In order to build one you need to find a way to get things done at a fraction of the cost that larger competitors can. The primary cost in early online ventures is labor. It's critically imperative to keep this cost down by getting people to work for free, for stock, or for deferred payment.

Problem: Most people can't see the forest through the trees. It's hard to find those special people who believe. It's hard to find anyone that will give up even a few hours a month for anything other than cash. Occasionally you can find someone who's interested... at least for a little while. Take for example the comic strip we did for a while over at Miss Video Game (I've inserted it below). We looked a long time for a person who had talent and was looking to build a fan base and I thought that we had found the guy. His art work was a perfect fit for the site - the comics were popular and we had a good dynamic between my story lines and his illustration.

(Story by Mark Donovan, Illustrations by KevRoche)

We got Kevin on board by offering to insert Google Adwords into the comic strip pages on MVG, and giving him 100% of the revenue from these ads. Our concern was driving traffic and building community within our sites, so having the comic was much more important to us than fighting over ad revenue. After a couple of months it became harder and harder to get a hold of Kev, then we didn't hear from him at all. I think he was disappointed that he had accumulated a modest balance in the adwords account after a month. This is where the forest from the trees reference comes into play - the comic was popular, it was growing and receiving great feedback, but most people want success right now. They look at other successful companies and expect to be at that level within a few weeks; unfortunately for us all that's not how it works. Getting to the top requires patience, fortitude and hard work. When he didn't get instant success he fell off the radar.

Lesson learned: Never create a similar relationship until I'm positive that person has the vision to see project out to the end.

If you're starting a project, whether it's a large business or a comic strip, make sure the people you take into the trenches with you are there for the long haul. Make sure they're passionate and love what they do so much that they would do it for free, because at the end of the day they'll probably have to. If they're worried about getting cash, send 'em packing.

A Blank Splash Page

Coming Soon!!!

Here's a tip to anyone releasing a website. Listen to it, assimilate it, learn to live it. I've looked pretty... well... down right stupid a few times by committing to dates. (there I said it - I do dumb things sometimes. I'm pretty smart, but sometimes I engage in some very head-slap worthy acts of idiocy. If you don't want to be my friend any more I'll understand)

It's your job as the person at the top (or near the top) to know that software developers lie. Not always on purpose - Some developers are scoundrels and will royally screw you (DO YOUR HOMEWORK), but most of them genuinely believe they can deliver in the time they quote. The problem is, in all of the websites I've been part of building, I have NEVER, not once, nadda, zero times seen one delivered on time. Late deliveries vary, but a good rule of thumb is to take whatever time a contracted or in-house developer quotes you and add at least 25%. This is true for seasoned vets too - add extra time if you are employing a noob.

As you might have imagined from the tangental odyssey above, today's blog is about delays. We were supposed to launch on Friday, but when we transfered our code from the test servers to our live environment all hell broke loose. We were seeing bugs we hadn't encountered in ages and the intro page we had implemented was not behaving. With broken hearts we delayed the launch. The idiotic part is that I had told many of our investors, friends and family that the launch was going to happen. That's the risk you run when you commit to dates without a finished product in hand. At least we were smart enough not to issue press releases or alert the media. I said was dumb not a lost cause!

In summary, development ALWAYS takes longer than promised, don't commit to firm release dates until you have a solid working product, you'll make dumb mistakes sometimes - be sure to make up for them.

Now I'm going to go stare at our blank splash page and cry.

Advisory Board Announced

We've been fortunate enough to put together an extremely talented team of advisers to help guide us through the battle to come! The team is made up of very diverse individuals who have all excelled in their areas of expertise.

Below are some brief intros and backgrounds.

Curt Ketterer

Curt is the Chief Operating Officer of First Quadrant. First Quadrant is an innovative boutique investment management firm serving investors around the world. Headquartered in Pasadena, California, the firm manages client assets of approximately $37.5 billion. He is First Quadrant's partner in charge of operations, finance, and administrative functions, and serves in the firm's executive office. Curt's 21+ years of financial and investment advisory experience include service as senior vice president of finance at Trust Company of the West and, prior to that, as chief financial officer of Security Pacific Investment Group. He also spent nine years with Arthur Andersen LLP, and is a certified public accountant. Curt earned an MBA in finance from Loyola University in Los Angeles, and holds a bachelor of science degree in accounting from California State University, Long Beach.

Robert MacKalski

Professor MacKalski is an experienced entrepreneur and currently a doctoral candidate and professor at McGill University's faculty of management. After receiving his MBA from McGill Robert co-founded Stria, the parent company of the Peachtree Network. The Peachtree Network was North America's first online grocery portal. MacKalski took the company from the ground floor up to its IPO when he left the business to take a teaching position at his alma mater. Robert has served as a consultant to many leading companies in Canada and as an expert witness in court cases involving marketing and trade mark infringement. He is an expert in the field of branding and brand management and will add significant value to our mission of becoming the leading brand in online video gaming.

Timothy McCunn

Timothy is a Partner at the Borden Ladner Gervais law firm. He received his Bachelor of Commerce from McGill University and his Bachelor of Laws from the University of Ottawa in 1985. Tim was called to the Ontario Bar in 1987. He is the chair of the Venture Capital Industry Group and a member of the Capital Markets Group. Tim has been involved in over 200 transactions involving the financing of both technology and biotechnology companies across Canada, acting as counsel to issuers and venture capital funds. Tim is fluently bilingual in English and French, and practices in both official languages.

Egidio Nascimento

Egidio has over 17 years of financing experience including filing prospectuses. He is currently the CFO of Variation Biotechnologies. Prior to joining Variation Biotechnologies, he served as the Vice-President of Genome Canada managing over 600 million USD in funds. Egidio was the CFO of two hi-tech start-ups, including a Nortel Networks spin-off, and also held various positions at KPMG LLP, most recently as Senior Manager of New and Emerging Businesses. Egidio is an officer or on the Board of several organizations including being a Trustee of The Portuguese Canadian Education Foundation.

We're looking forward to tapping the collaborative intellect of these industry vets and are sure that they will contribute greatly to making our company a global brand in the gaming industry. Oh, and they'll also hopefully keep us from doing anything too stupid!

Where's the brand?

I read a LOT of books about branding in university. In my humble opinion only one was worth the time. It's short, painfully simple and the best book on branding you'll ever read. It's called the Brand Gap by Marty Neumeier. Let me save you the time looking for it - you can read the simple slide show presentation below. Do it - all the cool kids are.

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The vast majority of the players in the video game industry don't get branding. Most community sites geared towards gamers look the same, are full of similar content and are a usability nightmare. The only people that understand usability, branding and aesthetics in the gaming industry seem to be the people who make the games. Think about it - when was the last time you saw a video game menu that was cluttered full of information, hard to navigate and unattractive? I can't think of one - especially not in the past few years. So why are all the gaming sites, which are geared towards the same audience, so dull and uninspiring? Why not make a site that looks and acts like a game menu? We think that very premise is where we will get a lot of our differentiation - how we will zig rather than zag as Neumeier puts it.

Our site looks, feels and acts differently than anything else in the space. It is designed to create the tribal gut feeling reaction that makes a brand charismatic. We're working daily on improving upon how we communicate the brand and we've got more work to do to make it clear, simple and compelling. We want to be the Halo of online gaming communities. Why Halo? Because it's got a great brand that's why! There's a reason why it's the biggest entertainment release of all time, why star director Peter Jackson has been trying for years to to make a movie based on the franchise - BRAND!

We're laying the ground work for extensions to our site to reinforce and bolster our tribe. We're building the story line and characters for a web comic based on the TitanStrike universe, a podcast discussing games/technology/music/movies, and challenges pitting our users against gamer celebrities. All of these extensions are meant to compliment the brand and create a movement.

We think this will speak to people - but at the end of the day as Marty puts it:
A brand is what THEY say it is - not what YOU say it is