Advertising has driven the majority of Internet innovation
My firm GRP Partners recently funded a young LA based company named Ad.Ly that is an “in-stream advertising” company currently focused on monetizing Twitter. This has prompted many people to question whether advertising “in stream” and on Twitter is a good thing or a bad thing. I understand that when people read about ads they initially have an aversion. If that’s you – please read on. I will argue that advertising funds many of the things you find near and dear and is actually a social good.
We’re clearly in the early stages on Twitter monetization but let me offer some views on why we find Ad.ly so compelling (other than the fact that the CEO Sean Rad is a great young technology leader and his advisers – Brian Norgard, Dan Gould and Evan Rifkin- are some of the guys I respect most in the LA tech market.)
So what do we mean by in-stream advertising?
OK, many of you will know this but just to base line. Web 1.0 was the “static” web. Traditional media companies published their stories on the web. Web 2.0 was the 2-way web. Turns out everybody likes to produce content and take part in the “conversation.” Massive uptake of user-generated content including blogs (e.g. Wordpress), video (YouTube), pictures (Flickr), review sites (Yelp) and collaborative content (Wikipedia). Also, lost of people leaving comments on websites and having a dialog with other users.
Image courtesy of Bernhardt Haussner
Turns out this conversation is pretty important and what many people want to do. Facebook popularized the short-form “status update” and this initially is called the “feed” but over time starts to become known as the “stream.” Twitter then popularizes the idea of having only a stream (e.g. not all the other applications that were competing for user attention in Facebook). So we ended up with “real-time streams” in Twitter, Facebook, MySpace, Blip.FM, etc. People rightly recognize that comments on blogs are just a form of a stream and thus the growth of open commenting platforms like Disqus and IntenseDebate.
But the most public and open stream right now by a long shot is Twitter. And it is the most notable media darling not making any money so everyone is asking the question – how will they make money? Many people have speculated a variety of revenue sources such as charging 3rd parties for their data, charging power users for their accounts, charging “verified users” for their certified accounts, etc. But many people naturally revert back to the question if they should just show ads.
If anybody is to show ads you then need to decide: banner ads (how’d that go for MySpace?), contextual text ads (e.g. Google’s AdSense) or some other form of ad. Banner or AdSense style ads placed either at the top of the page or down the right hand side (often called a skyscraper) would only net Twitter money for users that log into Twitter.com. Remember, Twitter is as much of a data pipe as it is a website. Much of the Twitter stream is read on third-party applications where Twitter doesn’t own the real estate to monetize it. That is owned by people like Seesmic, Tweetdeck, UberTwitter and Tweetie. And at least in the case of UberTwitter I can tell you they do run their own banner ads.
The other possibility is for the ad to go into the Tweet itself. This means that if Kim Kardashian were to send a Tweet saying, “You’ve got to check out these awesome new jeans” and then a link to a website of a jeans provider the ad would be the Tweet itself.
Won’t users get pissed off is Tweets become ads?
It’s an interesting question and many people are trying to figure this out now. See Jason Calacanis’ recent Tweet asking for his users’ opinions. FWIW, I don’t think asking for users’ input is the same as testing it and seeing reaction. We’ve run enough campaigns to known that users have been tolerant of authentic ads.
If you’ve been around long enough like I have it seems like I’ve seen this movie many times before. I remember in the mid-90’s when banner advertising started. The first ads I remember were on HotWired. Users were outraged. “The Internet is free, you can’t make money off it! It’s for all of us. It’s not TV.” Do you notice 
anybody complaining about banner ads these days other than from advertisers complaining that they’re not effective (80% of all clicks come from just 7% of all users and CTRs [click-through-rates] continue to drop dramatically).
I then remember when Amazon started selling books on the web. That was a kerfuffle too. I know that it sounds weird to those that don’t remember those days but people were pissed off that the Internet was becoming commercialized. Next came search results based on people paying to be high in the result set. My firm was an early investor in Overture (then called GoTo.com) who created this category. As John Battelle chronicles in his brilliant (and must read) book, The Search, Google thought this idea stunk. So did the media. But it turns out that consumers didn’t think it sucked. So Google launched Google AdWord and AdSense based in part on technology it acquired when it bought an LA-based company called Applied Semantics.
Then came blogs.
People got their knickers in a twist when they saw people like Michael Arrington and Robert Scoble having advertisers and endorsing brands on their sites. These advertisements or mentions of endorsements in the text were always clearly denoted as advertisements. Did you stop reading TechCrunch?
So that’s why I say I’ve seen the movie before. Uproar. “I’m shocked, shocked to find that advertising is going on in here.”
But come on, doesn’t it suck that we now have to advertising on Twitter?
No. Advertising is great. If there were no advertising on Google we would have no Gmail, no Google Maps, no Android, no Google Books. Why? Because they wouldn’t have the enormous amounts of profits that they’ve been able to sink back into research & development. The same debate always occurs with the pharmaceutical industry. If they can’t make profits off of drugs there will be no discovery and our future diseases won’t be cured. Advertising is also what allows you to watch Hulu for free, use Yahoo! Finance and a host of other wonderful services brought to you by their sponsors.
Why do you think this form of advertising will be effective?
As we learned from our investment in Overture and the subsequent success of Google, “intent-based” advertising is enormously powerful. When I as a 41-year old living in Santa Monica with 2 young boys type “Halloween Costume” into Google it is pretty clear that there is a highly likelihood or intent by me to shop for Halloween goods. And if even 1% of users click on the ads because they’re relevant rather than on the organic search it’s a HUGE business (as you know).
People mistook the fact that these text advertisements worked in Google to say they would work in social networks. After all, when I’m in Facebook they know one hell of a lot more about me than Google does. So why not put up those Halloween Costume ads when I’m on Facebook? It turns out that when I’m there I don’t have the same intent to purchase as I did on my Google search. So PPC (pay-per-click) advertising on social networks has performed poorly to date.
Why am I excited about in-stream advertising then? First, I have chosen who to follow on Twitter so the information in my stream is self selected. It turns out that Twitter and other steams (including Facebook) are occupying an inordinate amount of Internet users’ time now. I have to imagine that it will continue to suck time away from search as more people are discovering information from their friends and peers rather than seeking it out through search.
I divide the stream into 2 categories: one is the “I’m at dinner with so-and-so” Tweet. The other is: check out this link! Because Twitter is constrained to just 140 characters the real power of Twitter is link sharing creating what Jeff Jarvis and others have sometimes called the “link economy.” When I choose who curates my information and when these people are Tweeting things such as, “I’m outraged by this Maureen Dowd OpEd” or “check out this video from last night’s game” our clicks go through the roof. This is why many people are so excited by how much traffic they’re now generating from social media. See Fred Wilson’s post on Twitter referring traffic. The initial data we are seeing at Ad.ly about CTRs even on ads is very impressive.
Won’t people just ignore these ads and/or unfollow people who Tweet them?
I don’t think so. For starters, if a non-parent Tweets out, “you gotta check out this baby stoller” it’s obvious that it won’t be very authentic. I believe that authenticity is the key to successful in-stream advertising campaigns. Obviously copy is also important so we obviously need to A/B test copy and link placement as well as demographic, geographic and psychographic performance. We need to know which users have authority are therefore driving the highest conversions by category of ad and which channels drive clicks.
In the Ad.ly model each advertiser can choose which “publishers” (the person Tweeting) they want to make an ad available to (or not) and the publisher can choose whether they want to run the ad. If the publishers aren’t running authentic ads they won’t convert well, the analytics will track the lack of performance and the marketplace will adjust. The next campaign will be run with different publishers.
We have a responsibility to make sure that users always know it’s an ad. So we label these Tweets clearly as ads. But if you’re favorite movie star sends a Tweet saying, “Check out this trailer from my latest film” I don’t believe they will be unfollowed. More than that – I’ve seen the data!
Won’t Twitter just do it themselves and crush you?
Maybe. But I don’t think so. I believe that Twitter is (rightly) more preoccupied with the growth of their network and the engagement levels of their users. If people abandon Twitter to use Facebook’s stream then it won’t matter how much short-term money Twitter makes. Just ask MySpace. And I believe that Twitter has an interest in seeing some third-parties make tons of money out of their platform.
Why? A healthy eco-system of application developers is required for any software or Internet company to be massively successful. It creates free innovation on your platform that drives user growth and engagement. If Ad.ly delivers significant revenues (which they share with the publishers) then the people who are driving real revenue for themselves have a vested interest in staying with Twitter. They’re not currently monetizing their status updates on Facebook – I can tell you that much!
And if they can monetize their follower base then they have an incentive to grow their base, Tweet more, engage more and write better quality Tweets. Everybody gains. I believe Twitter will support this.
Don’t you worry that we’re just going to get overloaded with Twitter spam?
I used to. But then I went to the Parnassus Group’s Twitter 140 conference run by Steve Broback and Brett Schulte. I was simply BLOWN AWAY by the quality of innovation by 3rd-party Twitter developers. It was like a whole shadow infrastructure to the Internet. People were developing adds for meeting coordination, sending long-form Tweets, organizing a TV Guide, building follower lists, developing Twitter authority rankings, Twitter analytics platforms, etc. So many I couldn’t mention them all. Check out TwtApps alone!
And then I saw many people developing Twitter spam filters. Duh. We have spam filters for our email. We have it to filter blog comments. Necessity is the mother of all invention. Spam filters are coming to a stream near you.
Why do you believe Ad.ly will win?
Listen, it’s the first inning. If we continue our success we will have strong competition. That’s a good thing – it means there’s a market. But 70% of my investment decision in early-stage companies is the team. 30% is the market opportunity. This blog post is about why I think the market opportunity is large. But I believe we have a good chance of winning because of the team. The Founder & CEO of Ad.ly is Sean Rad. He’s exactly what I look for in a technology CEO. He’s product obsessed, visionary, inspirational and contagious to be around. He’s mature well beyond his years. When a 23 year old can comfortably sit with people in their 40’s & 50’s and converse about business and technology you’ve got somebody special. People around him love him. And he has high integrity. He really wants to do this the right way.
Sean has been advised by three individuals who have spend the last few years doing behavioral targeting of advertisements. They know a thing or two about the ad space. All of them are really sharp on product and market.
We were in the market early so we won’t build a “me, too” product. Our vision goes far beyond the first inning so anybody copying what we’ve built over the past year won’t necessarily see where the ball is going. We think we know. But as with any early-stage company: it’s a bit of skill, a bit of timing and a bit of luck. I just remind Sean of the old adage, “the harder I work, the luckier I get.” 
What do you think about advertising coming to Twitter and other streams?
Update
The topic is heating up as a result of this article in the NY Times. We’ll see where all of this heads but let me point out one irony / hypocrisy. Facebook is quoted as saying they don’t allow in-stream ads. But they’ll happily serve up ads along side the stream. In the first instance the person messaging would make 70%+ of the revenue in the second case they would make 0% (while Facebook would make 100%). Let’s not be Pollyana-ish. There is money at stake and people have vested interests. But I believe that any in-stream advertising, if clearly denoted as such, should be fair game if done authentically. Note that artists / musicians made zero out of advertising when they promoted social networks to fans. These sites become popular in part due to these stars. Letting them collect a percentage of the revenue for their efforts seems fair enough to me.
