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2010 is going to see a bonanza of opportunities

BLUE: Brand Websites
RED: Social Networks

What does this mean? Websites are media. In TV language, Facebook and Twitter are like huge networks with thousands of channels featuring hundreds of programmes tailor-made by people who share your interests.

Brand websites are like individual channels sponsored by one advertiser broadcasting a programme you may or may not like. (In other words, take it or leave it.)

On a social network, you create the content together with your like-minded social circle. You cook what you like to eat.

On a brand website, you eat what they serve. If you don't like it, you don't go there. If your tastes change, you leave.

No one would create a new TV channel just to broadcast a new TV commercial. Why create a new website?

That's an extreme example and brand websites have their place, but the (logical) trend is a shift toward social media. Because people always gravitate toward more freedom of choice, not less.

Admittedly, that is not a major statement to make, as few companies have the firepower to make a $1 billion + purchase. But I do see this playing out in 2010.

Here’s why.

Social media is revolutionary, but it’s not the best canvas for advertising. We’ve seen various iterations of social media all belly-flop with advertising (UGC being the most notable).

These days, the obsession is with monetizing Twitter with advertising. I don’t think that is the way to proceed. We first made that case in Twitter’s 140 problems where we looked at e-commerce opportunities. Frankly, that was a couple of years ago. Today I see Twitter as a lean and stripped out “content and user management system” with a licensing model. Basically, follow WatchMojo’s latest videos here or my pontifications here. If this is a $1 billion company, so be it. It’s clearly not what you or I think; valuation is largely determined by the greater fool theory, where you just need someone to come along and bid $1 more.

When the recession hit and advertising retracted, I thought this was a good thing for the company, because it forced them to think outside of advertising.

The Twitter PR machine said “Well, we never really wanted to insert ads” but now that the economy has stabilized and advertising is flowing faster to online and wireless, advertising-as-the-model is back in vogue.

Of course, a lot of this is the media writing about it.

These days Twitter itself is hinting at commercial/premium accounts, which is vague.

Honestly, I think Twitter needs to grow up and start to experiment with commercial methods, fast. But since 99% of business models and business plans are DOA, they fear doing anything that shows just how hard monetization is.

Clearly, they wisely raised $100 million before growth slowed down, but now, it’s time to stop talking and build a business. The impression I get is that they keep moving the chairs around and it’s becoming a tad tedious. I don’t blame them at all for raising a massive round while they remained in spreadsheet-only-business-model mode.

How Will Users React to Twitter’s Business Model?

Trust me, whatever the model, the users won’t mind. Well, let me say that the bulk of users who don’t really use Twitter won’t even notice. The power users will just welcome the fact that Twitter is doing something. If it’s acceptable, the users will at least know how - if at all - it affects them. If it’s not, the users will go crazy and Twitter will adjust. That’s the beauty of web business models and their user ecosystem.

Developers, Developers, Developers…

Most importantly for Twitter, the developers who build Twitter-based apps need to know. Facebook seems like a dangerous platform to build apps for because of their track record of (naturally) changing the rules of engagement to maintain power in the ecosystem.

I Don’t Even Know What I Don’t Know…

I think the reason why Twitter has been a bit more liberal and open is that they themselves don’t know where the ship is headed and are willing to ride it out.

So Why Will MSFT or GOOG Buy Twitter?

Ultimately, I think they will offer for free something someone else charges for and that will encourage that someone else to just buy them for something like $1-2 billion.

From the above-linked NYT article:

Tuesday was another typical day for John Chow, blogger and Internet entrepreneur in Vancouver, British Columbia. Mr. Chow treated his 50,000 Twitter followers to a photograph of his lunch (barbecued chicken and French fries), discussed the weather in Vancouver and linked to a new post on his Internet business blog.

Then he earned $200 by telling his fans where they could buy M&M’s with customized faces, messages and colors.

So basically, instead of Google (GOOG) managing leads and referrals for you through their organic and paid search database, Twitter will offer you referrals through their followers and advertisers database. Great. Glad we know the plan.

The thing is, Twitter, I think, won’t charge for any of this, at least not initially.

Recall that with the $25 million that Kleiner Perkins and Sequoia gave Google, it was enough to bankroll free-freaking-search to users. Don’t you think Evan Williams, Biz Stone, Fred Wilson et al. will be able to keep Twitter free long enough thanks to their $100M until Google realizes that Twitter is doing what Microsoft (MSFT) threatened to do, which is make ads free so that Google loses revenue?

Once this materializes - and it’s possible to argue that it already has - then either:

- MSFT will buy Twitter so it can continue to keep referrals free, forcing Google to reduce their cost-per-click rates down, and thus lose revenue,

or…

- Google will buy Twitter to do what it does best: shut it down and avoid this scenario from happening.

Sure, you can argue that Twitter doesn’t want to sell, blah-blah… but while Facebook resisted selling but has since raised revenues to $550M or so, I am not sure the same will happen with Twitter, for Twitter, we once argued, was Facebook but with less upside. I don’t know if these two companies are even worth comparing anymore as they do wildly different things, but all in all, while Facebook probably did the right thing by not selling, it remains to be seen if Twitter should hit the cash register in 2010 or not.

The topic of whether in-stream advertising has heated up.  I just read well written pieces on the topic by Ross Kimbarovsky, Robert Scoble, Paul Carr and the NY Times.  I myself recently covered the topic when I spoke about why GRP Partners invested in Ad.ly.

Let me lay out my defense of In-Stream Advertising because I believe the topic is really important.

1. People feel angst about advertising in any form – I feel the same feeling about advertising as most consumers.  I feel it’s a necessary evil.  Yes, I often skip commercials when I watch on my PVR.  But I also accept and appreciate the ads in Hulu because I know that I’m watching shows for free.  I know that advertising is important to inform consumers of offers – the same reason many tech companies use SEM.

2. This debate is awfully familiar - This debate is so familiar to me.  GRP Partners invested in GoTo.com which rebranded as Overture.  At the time Google said it was against sponsored links because it confused the person searching for content – one of the main arguments people are again using about in-stream advertising. John Batelle profiles this well in his book The Search.  Our portfolio company did so well that Google copied this approach and out executed Overture.

It was still a great financial result for us but we clearly didn’t become Google.  But our investment and the thesis of the team led to huge leaps of innovation that all consumers now benefit from.  It led to the creation of Google Maps, Gmail and many other projects that without ad dollars wouldn’t exist.  Are you horrified when you search for an address in Google Maps and ads pop up?  Why not?  Probably because it has become the norm over time and it is handled in a tasteful and acceptable way.

3. In-Stream rewards the content producer, Contextual just the technology provider – The funny thing about contextual search like that in Google is that it benefits the tech company and NOT the  content producer at all.  Think about this – bands and stars helped bring people by the millions to MySpace.  Having amassed a following they realized that MySpace was able to put ads everywhere and make all of the money.  Some goes with Google.  All of us bloggers and journalists create content that gets indexed and allows Google to serve up ads alongside us that we don’t benefit financially from.  When a content producer promotes an ad in-stream the revenue flows mostly to the person who published the content.

4. Transparency, authenticity and quality are what matters – So should everybody be sending out loads of Tweet Ads?  I would argue that they already do.  What does it mean when Michael Arrington sends out a link driving you to his latest article on TechCrunch? That’s not a “conversation” – it’s content driving you to his website where he monetizes based on the number of eyeballs he drives there.  You could argue that his banner ads are transparently advertising and are therefore OK. But people complained as loudly about HotWired when they started with banners (they were the first website to do so in the 90’s).  People complained about contextual search when Overture innovated the model.  And now everybody is laying into in-stream advertising.  The more things change …

At Ad.ly we believe that in-stream ads need to be as transparent as banner ads.  So we mark everything clearly.  We restrict the number of Tweets so that we can control quality.  We encourage publishers and advertisers to match based on authentic promotions.  If Robert Scoble sent out a Tweet that is clearly denoted talking about RackSpace would  people really be offended?  Should he remove the RackSpace logo from his Twitter picture or is that type of advertising OK?  Who decides?  I find it totally acceptable because I believe Robert has high integrity and manages church / state issues himself.  If he didn’t, I would unfollow him.

When Jason Calacanis opens his TWiST show talking about his sponsors to you gag and stop watching?  No.  You think, “I get it.  He needs to speak about these guys to fund a show that is seriously high quality so I’ll put up with ads.”  Why is that acceptable but Twitter isn’t?  I assert it’s just because Twitter advertising is new and we’re trying to sort out the norms.

When Brad Feld lists a book on his blog with an affiliate link that he monetizes is that wrong?  I don’t think so.  We all know and trust Brad to be authentic.  How is that different from an ad in the Tweet stream?  Should affiliate links to Amazon be acceptable in a blog but not in Twitter or Facebook?  Why?  Why not?

When Facebook puts contextual ads on your pages is that wrong?  Oh, I see, it’s Ok because it’s not in-stream.  So only the technology companies can make money from ad links and not the creators of content?  I think we need to be careful that any in-stream links are clearly marked as an ad – but reject them all outright?  Seems an arbitrary demarcation to me.

When TechCrunch 50 has sponsors and those people get to speak on stage does that mix church & state?  It sure pushes the boundaries.  But we all accept it because  we know that it is the norm for conferences.  No prizes for checking the correlation between panelists and TC50 and sponsors.

Again, I personally trust Michael and Jason to manage this quality.  If they crossed the line we’d stop attending.  If Twitter publishers cross the line we’ll stop following them.  But if they mark a Tweet as an ad I can choose to click the link or not.

5. In-stream does not equal spam – I sometimes get @ replies from people unsolicited with a link to an ad.  That is spam – full stop.  I haven’t chosen to follow this person.  But if someone that I have chosen to follow has an ad I am ok with that if it’s labeled.

6. Let innovation happen and the market decide -  I don’t how all of this will end up.  I’m hopeful that Ad.ly will be a prosperous addition to the Internet ecosystem.  But it is very important that we let young companies like this experiment.  I assure you Ad.ly will take the high ground and control quality.  We care deeply about that.  I have a vested interest – not just due to an investment in Ad.ly but also because I care deeply about innovation and the evolution of the Internet.  Rejecting new business models for pushing boundaries does not encourage innovation.

If the market rejects in-stream then the market wins.  I’m fine with that.  But let’s have an honest discussion about the topic.  Vitriolic attacks on in-stream advertising obfuscate the issue.  And if the market rejects in-stream then we still win.  Strike one up for entrepreneurship, innovation and pushing the boundaries.