Thursday, May 15, 2008

BriefingsDirect Insights analysts probe future of online advertising and find transactional lucre lurking

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The future of online advertising captures the headlines and attention when the likes of Microsoft courts the likes of Yahoo! And Wall Street still has a hard time figuring out how much Google is worth, based on just those little text ads next to search results.

But the future of online business has a lot more in store than advertising as we know it. The cloud compute fabrics now being constructed can support a lot more finely tuned matching of buyers and sellers, for consumers and businesses alike.

In the latest BriefingsDirect Insights Edition, Vol. 29, our experts examine the future of online advertising, and how the gathering cloud of services hosts like Google, Yahoo, Microsoft and Amazon will fare in the next era. The consensus moves toward an algorithmic meta-data driven future in which the winners will likely be taking a piece of many online transactions. This real-time marketplace can scale up to global mass media, and down to the audience and location of one.

So join us for our latest BriefingsDirect discussion and dissection of software, services, SOA and compute cloud-related news and events, with a panel of IT analysts. In this episode, recorded May 9, 2008, we gather noted IT industry analysts and experts Joe McKendrick, an independent analyst and ZDNet blogger; Tony Baer, principal at OnStrategies and blogger, and Phil Wainewright, independent analyst, director at Procullux Ventures and ZDNet SaaS blogger. This discussion is hosted, produced and moderated by me.

Here are some excerpts:
I really think people have got this completely the wrong way around. To focus on advertising is just so "0.0," to coin a phrase. Advertising exists only because we don't have the Web. Advertising is something the B2B market has to use through magazines, TV shows, or whatever, because they couldn't reach the consumer directly.

Now, the Web enables people to reach potential consumers and business prospects directly, rather than having to go through this advertising. So, the idea that the software industry is going to get funded by advertising has got it completely the wrong way around. Actually, what is going to happen is that business is increasingly going to use software in order to get closer to its consumers and its prospects. It can actually skip having to spend the money on advertising in order to make that connection.

Let me explain how that might work, instead of running adverts on sites that host discussions about bookkeeping services for small companies, for example, or instead of paying for search ads that pop up when people are searching on the Internet for bookkeeping services for small companies. As a small company, if you are using a financial application to run your company and you want some bookkeeping services, a bookkeeping service might pop up as a menu option in the software. You can sign up for and use an outsourced service over the Internet.

Instead of the bookkeeping service actually having to advertise on the search engines, in the publications, the discussion forums, and the social networking sites, they just pay to have their service made available within a software package that relates directly to the service that they are offering.

Therefore, it's not really advertising any more. It's just product placement at a point where the consumer or the business, in this case, actually needs that service.

Now hold on. So, what we were saying is that business activities and consumer activities more and more move online. Not only will we be doing away with the on-premises software business to a significant extent, but we will be doing away with the advertising business to a significant extent. Then, no longer will the entertainment businesses be glossing themselves with adverts to support themselves, but, increasingly, we'll see placement of services in the context of an activity or process, be it for consumer, entertainment, or business, in the same way that we might go to a shopping mall. People pay rent to the mall organizer, which draws people in, to put their wares out on the doorstep in front of the glass pane, in order for people to pick and choose.

So we are moving from an advertising to a placement or even visibility value, and it becomes rent to those who can draw the people in.

I think that there are some indications that the bloom is off the rose of social networking, both as a significant revenue generator, as well as an application development platform, at least for one of the social networks to become a development platform. That's from some recent revenue indicators from Google that its relationship with MySpace has not proven to be as monitizable as they expected.

Some recent statistic show that the types of applications that have been generated on Facebook are very tenuous, very one-off or fun things that would appeal to teenagers, but not with any significant depth or business value. The amount of activity from developers on Facebook has been slacking off, or at least plateauing, which is not a good indicator.

I remember back in the Web 1.0 boom and the dot-com boom, one of the things that was interesting was the discussion sites were very bad at generating ad revenue, because people didn't click on the ads.

The cost per thousand (CPM) for discussion sites, or for the discussion area of a site, was always a lot lower than other types of sites that were more information heavy. So it's old news about kind of sites where people follow what other people are saying.

People start chasing page views without remembering the reason that they are chasing is to generate value for advertises. They think, "We've got lots of page views," but they don't think back to whether those page views are going to deliver value.

Another memo from Ray Ozzie surfaced a couple of weeks back. You may recall the memo back in 2005, the famous "turn the world upside down" memo that talked about the advertising support of the online model for software. He kind of reinforced that with his latest memo.

It wasn't saying, "We must offer software advertising to support software," but it was more of a discussion about the social mesh, the community, the social networking, a paradigm that's emerging.

It's going to be interesting, but I think it's going to leach into the enterprise over the next couple of decades as well. I'm talking years from now, but it's definitely a model that will be sustaining consumer computing. We are seeing that emerging on the social computing side.

You start looking at migration to digital broadcasting. At some point -- I don't know the exact technology mix involved -- combining that with the Internet, there will be some way of micro casting. There may be a large population segment watching a specific program, but you maybe identified in terms of which demographic you specifically are. It's almost sounding 1984-ish.

I think Google actually realizes that and understands that. Therefore what they are aiming to do is get into TV advertising and all these other sectors. These are vendors that enable this kind of personalization of the message, being a conduit between the prospects and the business that's trying to sell to that prospect, and using software automation to enable that.

They are thinking beyond the old model of advertising, and I think that's Microsoft's problem. Microsoft hasn't really understood this, is still thinking about online advertising as a segment, and is not looking beyond the wider opportunity to use the automation on the Web as a way of just bringing buyers and sellers close together.

This requires a tremendous amount of cloud compute to the same levels we have seen in matching search criteria to results and then matching that to advertising. That advertising is then bought through an auction bid process among those seeking the highest placement. So, if we take that same model and apply it to all sorts of different needs and wants of business, personal, entertainment, and luxury across the board, what do we call it? It's not really advertising.

So, we think that advertising is in the rear-view mirror. We're going to move to a new era of something different or better, perhaps subscription as a business model, where you, in a sense, rent digital assets.
Listen to the podcast. Read a full transcript of the podcast.