Andrew Chen Archives

This is a very smart move for Spot Runner: Spot Runner Gets Media Investment. For those of you that haven’t heard of them, the company is a very interesting cross between online and offline advertising. Basically, they have an online interface where small to medium advertisers can create TV commercials on the cheap (think templates, stock video, voiceovers, etc.), and then they handle buying from local stations to drive down the cost.

They are part of a fascinating trend of leveraging online strenghts in aggregation and automation, and then applying them to offline channels. NextMedium is also in the same functional category, for product placement. DS-IQ is such a company for outdoor/digital signage, and dMarc is such a company for radio.

Anyway, since obviously TV is most brand focused (minus those 1-800 infomercial or Girls Gone Wild type commercials), it’s clear that Spot Runner needs the support of a lot of brand advertisers to make their business viable. What’s a better way of doing this than getting one of the world’s largest brand agency conglomerates to buy a chunk of your company? Spot Runner is doing all the right things to build those deep, Midtown Manhattan relationships… other companies focused on brand advertising (in particular all those video ad networks) should watch them to learn a thing or two.

Link: QA with Moneyball author and sports economist.

Interesting interview with one of my favorite authors, Michael Lewis. (BTW, light on blogging these days since my MacBook Pro is out for repairs on the right fan)

Link: YouTube: From Concept to Hyper-growth. (Text summary here)

There are a lot of interesting bits to the YouTube story, but this paragraph was my favorite:

Problem was, nobody used YouTube. Karim shows another video of the
YouTube boys sitting around pondering their existence. Nobody’s going
to watch this, they complain; “This is lame.” To try to attract
viewers, the three figured the best thing would do would be to get hot
chicks involved. So, Karim recounts, they posted an ad on Craigslist in
Los Angeles promising attractive females $100 if they’d post 10 videos
on YouTube. They got not a single reply.

I’ve been in exactly this mood with my friends, working on little side projects, and let me tell you – it sucks. It calls into question why you are doing what you’re doing, and it makes you wonder if your fundamental assumptions are wrong. It’s a dark moment of self-doubt. Honestly, it’s even worse when you feel like you’re leading a team, because the other guys are depending on you for vision and instruction, and it can be easy to feel like you’ve let them down.

But the important part to realize is that EVERY business goes through this stage. You always go through a step where, after a tremendous amount of hard work and inflated expectations, you watch your baby take its first couple steps. And almost consistently across the board, the first phrase is very rough. That initial traction comes from a very small group of people, the early adopters, who are the only ones who are willing to use your site without any references or recommendations.

Especially in a community site, where you need to solve a chicken-and-the-egg problem of users versus content, it’s hard to get the flywheel turning.

And just as every startup goes through this stage, the way out is almost always the same – if you did your job in the concept formation, meaning that your target market has been identified and they actually like your product, then it just takes a lot of sweat to get the flywheel turning. You have to get into the channels where your users are, expose them to your shiny new product, and go from there.

A lot of that can seem like low-value work. Rather than coding or strategizing or building, instead you are doing the Internet equivalent of standing on a street corner handing out flyers. But this "feet on the street" step is what’s necessary to get that initial traction. So spam those mailing lists, post in those forums, e-mail all those little blogs. Post your own content, lots of it. Get your friends to do the same. Otherwise, you won’t ever get past the zero audience stage.

PS. It’s hilarious to me that to find hot chicks (since of course, they don’t know any personally), they decide to post something on Craigslist of all places :)

Many of you that know may might find this news completely unsurprising, but I am leaving for Silicon Valley at the end of the year!

It’s both an exciting and bittersweet event for me – as a life-long Seattleite, I’ve grown to love the city and all the casual, low-key values it represents. Being local with all my friends and my family is an immensely rewarding thing. And on a professional level, I’ve been proud of our work at Revenue Science, where we’ve created a rapidly growing, dynamic, company. Only a couple years ago, we had a mere 2 media clients – now, we have dozens of top tier publishers like WSJ, ESPN, Washington Post, and a ad network that went from 0 to multi-billion impressions per month in just 1 year.

That said, I’ve always wanted to move to the Bay Area for the opportunities it represents, and for the like-minded people that I know there.

My last day at Revenue Science will be November 30th, at which point I’ll have to discover and decide on my new gig. I’m looking to found a new company or potentially join a very early stage startup. Should be a lot of fun to figure out where I’ll be in a year.

Jordan, a fellow Seattle tech guy, asks: Any comments on this? The New Media Audience Measurement Business Model Conundrum.

Well, Jordan, the problem is – metrics like CPM and CPA aren’t meant to measure how users "connect" with brands – they are simply economic metrics that capture media spend. Beyond CPM, there are other rich metrics that advertisers use, such as demographics, targeting, frequency, pageviews, etc., to measure the effectiveness of a brand sell.

You can see an example of ESPN’s cross-channel media kit, and their research on audience metrics. Sometimes as part of this, people do brand studies like brand recall, message association, etc., with companies like Dynamic Logic or Insight Express.

Thinking that "brand connection" metrics can somehow revolutionize brand advertising points to a serious misunderstanding of the brand advertising industry. Much of brand advertising is NOT based on metrics. No single set of numbers can ever change advertising agencies’ minds about where to buy media, without the human relationships to match.

This is really part of a long pattern of techies encountering different cultures and then assuming they can apply their own techniques to it. For a techies, the numbers are everything – they seem objective, and correct. Surely no one can argue with numbers, can they? So with things like brand advertising (and potentially  their love lives), techies want to boil things down to numbers, and argue from there. But that doesn’t always work, and that’s why many techies are single. (Turns out asking girls’ their SAT scores doesn’t always work)

For example, if a social network were able to show X brand engagement points for a financial audience, and X was larger than the metrics for a well-branded, established site like Wall Street Journal, a logical viewpoint might be that a social network would command a higher CPM. But really, that scenario will never, ever happen. Wall Street Journal will always command more dollars based on their reputation, and relationships, until new media companies are able to establish those. (And doing this involves buying lots of steak dinners, not showing people "metrics.")

As for as advertising goes, Web 2.0 is not special. Get over yourselves, guys. Media companies will figure out ways to incorporate social networks as some % of a multi-hundred million dollar advertising budget, and they will try and buy using common metrics across all their publishers. That’s the way it works, and no amount of Ruby on Rails will fix this :)

In my opinion, Web 2.0 companies need to figure out how to speak the advertising language, and figure out how their websites support what advertisers are trying to do. Connect with the current flow of money, NOT make up new metrics that are hard to understand. That should be the goal.

John Battelle comments on a recent click fraud article in WaPo: WaPo Does the Click Fraud Piece, I Scratch My Head….

I’ve been following the click fraud discussion for a while now, and it’s a emotionally charged topic because advertisers feel like they’re being cheated. One problem that’s complicated the discussion is that people simply don’t agree on the definition of click fraud – in fact, there’s really a huge spectrum of different practices that would or would not be considered click fraud.

Here are a couple definitions of click fraud, from really clear to cloudy:

• Building a bot to click on your own ads automatically
• Clicking on your own ads to drive revenue
• Encouraging users to click on your ads
• Users double-clicking on ads
• Having a confusing user interface to drive fake clicks
• Accidental clicks from ads being too close to content
• Placing high-value ads on unrelated content in hope of clicks

I think most advertisers would consider most, if not all, of these practices click fraud. The fact is, each one of these bring in users who may be uninterested in the content behind the ad. These "unqualified" leads result in lower conversion rates, where advertisers end up footing the bill.

Publishers and ad networks, on the other hand, probably view everything after double clicks as fair game. Their definition of click fraud is much more technical in nature – as long as it’s not someone consciously committing an act of fraud, from their perspective, nothing has happened.

The truth of all of this, however, is that advertisers don’t want low converting ad spend. So if that’s caused by a ad-clicking bot, or by clicks from confusing UI, it’s all considered bad. In the long run, the only way to solve this is to implement the sort of "smart pricing" that Google does, to drive a more consistent cost-per-action. This means that, over time, ad networks will start to gravitate towards this CPA model since it gives more consistency for advertisers.

One of the best articles on IDEO I’ve read in a long time: IDEO’s Urban Pre-Planning. Don’t forget to click on the pretty pictures on the right side!

It impresses me greatly that an approach for experience design and innovation can be as generalizable as what IDEO has. Anyway, read the article to get more info.

Link: The Top Pickers vs. the Pack.

If you held a coin-flipping contest with thousands of people, and had them flip coins over and over again, eventually you’d find one or two folks who had a long string of heads. Then, if you were to ask them how they did it, they might even have cogent explanations on how or why they had become coin-flipping "experts." At the end of the day, their ability to flip coins would still be 50/50, like everyone else.

The funny thing is, the model for PicksPal and the companies discussed in that article come from simply SELLING the predictions. So like mutual fund companies that keep thousands of funds around just to publicize the occasional winners, their interests are not aligned with yours. They just want you to transact (and buy picks), not actually participate in the winnings themselves.

When you see these companies actually investing their own money into the results, then that’d be the first indicator that the company believed the results were any good.

Link: Confident students do worse in math; bad news for U.S.

It’s always sad when journalists confuse correlation with causation, but even worse when they’re writing a story about math and they get it wrong!

The article states that confidence about math and the actual ability to do math seem to be inversely correlated. Then it enters a conversation about how making kids enjoy math and acts like confidence has anything to do with the resulting mathematical (in)ability.

As anyone with a basic understanding of logic would understand, a correlation between the two doesn’t mean that tweaking one will affect the other at all. It may be some third variable (oh, let’s say, constant scholastic competiton) that is causing the two. If the competition is high, then that could lead to both high performance and low self-assessment. The next step in this study would be the measure some of the variables and then try to assess causation.

This reminds of a common observation that attractive people are often insecure about their looks. It is because they are insecure that they primp so much :)

Worth reading for any internet ad junkie: Yahoo! Q3 2006 Earnings Call Transcript.

I will talk about the inventory glut. It has definitely been a huge change. You can see from the page views of a lot of the social media sites that exist today. That is going to change the market dynamics. What we hope is that it is going to bring in whole new categories of advertisers who have been focused mostly on the search side to be able to bring them to the other side of the kinds of advertising that is capable.

An interesting point is what a "glut" really means, in this case. Obviously it has to do with supply of ad inventory outpacing demand, but what kind of supply and what kind of demand? Well, according to Yahoo’s COO, the glut is being caused by the pageviews generated by social media sites.

But let’s dig into this deeper: As far as direct response goes, there’s no such thing as too much supply. For most direct response companies out there, they can precisely calculate the amount of money that is earned when a user visits their site and performs an action. Then they do the math to calculate, backwards, how much they can spend on an ad, in order to break even. As long as they satisfy that minimum, advertisers will spend as much money as they can get their hands on.

So ultimately, a glut implies one of the following scenarios:

1. Either, they don’t know how to efficiently monetize remnant inventory well, using direct response techniques…
2. … Or, they have so much inventory they can’t get brand advertisers to absorb it all.

In scenario #1, that means Yahoo has a clear weakness in technology, manifesting itself as an inability to squeeze money from social media sites. Otherwise, if every Flickr pageview could monetize like a Search pageview, they wouldn’t call it a glut – they would describe it as a huge opportunity. Obviously this doesn’t bode well for a company that spent 1/3 of their Analyst Day this year focused on how to incorporate social software into search and a bunch of other products. It could be that Yahoo is helping create a huge number of low-value impressions that they don’t know how to monetize.

As an aside, this problem of monetizing context-less inventory is a really big opportunity for advertising companies out there. Outside of the 5% of so of our day that’s spent on search, the rest of those pageviews go to random internet browsing, communications media like e-mail, IM, etc., and other low-context activities. Obviously, any company that’s able to figure out how to bring context into those areas, and help "irrigate" the Contextual Desert has a huge opportunity ahead of them. (I happen to work at a company which does such a thing, which is nice!)

The other scenario is just as dangerous for Yahoo. In scenario #2, Yahoo could be unable to sell brand advertising on their social media websites. As I’ve discussed before, advertisers like to buy brand media from properties that have, well, brand! And what is brand? It’s about trust, transparency, and consumers’ emotional connection with products and companies. For Yahoo to experience an oversupply of inventory there means that they aren’t effective in convincing advertisers to trust their properties enough to soak up all those ad impressions. This means that until these trust issues are resolved, it may be that the social websites they have will NEVER be monetizable at high CPMs (over $5), but instead must focus on sub-$1 stuff. Obviously, this is another huge worry for a company who is betting so much of their future on social web applications.

Ultimately though, this really should sound a LOUD warning for Web 2.0 entrepreneurs that are building social sites. Please keep in mind that:

1. Do NOT assume you can attract eyeballs and the monetization strategy will just come together
2. Do NOT assume that MySpace’s $900MM ad deal or YouTube’s $1.6B acquisition means there is strong underlying revenue
3. And finally, do NOT assume that every pageview is equal, and that you can perform "chinese math" to calculate ad revenues

Ultimately, every startup out there must be very methodical in how they approach the overall market. Do you have a brand-oriented strategy, or a direct-response one? And once you pick, you have to align your personnel, resources, and product to capture dollars in each specific advertising market. If you ignore all of this, you will end up with a 1999 bubble company with eyeballs and no revenue – while this might work out for the defensive or disruptive acquisitions, you certainly will remove a lot of potential suitors of your company.

From one of my favorite blogs: Persistent myths about Game Design.

As I’ve written earlier, I think the video game industry has a fresh and unique approach to product development that SOME high-tech companies could emulate. Specifically, video games are meant to solve an interesting problem – they are meant to systematically generate "fun" and "entertaining" experiences from users, which is difficult to design for. Because of this, the customers are central to every step of a game development process, rather than a theoretical afterthought. Having an abstract metric like "fun" forces them to constantly check with the user to make sure all their ducks are in a row. If their products were more "task oriented," my guess is that they wouldn’t emphasize the user so much, since completing tasks is much more concrete and traditional.

Because of that, you see game developers using rapid prototyping techniques, coupled with intense user-testing in order to prove out that their products are entertaining. Although web developers don’t face the same set of problems, I think there’s a lot we could borrow from the games industry, to see things from the users’ perspective rather than from a technology perspective.

Here’s an interesting paper published early this year: Skill vs. Luck in Entrepreneurship and Venture Capital.

This paper argues that a large component of success in entrepreneurship and venture capital can be attributed to skill. We show that entrepreneurs with a track record of success are more likely to succeed than first time entrepreneurs and those who have previously failed. Funding by more experienced venture capital firms enhances the chance of success, but only for entrepreneurs without a successful track record. Similarly, more experienced venture capitalists are able to identify and invest in first time entrepreneurs who are more likely to become serial entrepreneurs. Investments by venture capitalists in successful serial entrepreneurs generate higher returns for their venture capital investors. This finding provides further support for the role of skill in both entrepreneurship and venture capital.

An analysis and summary of the paper is available here. I just saved it to my desktop for future reading… maybe I’ll post a couple comments later on, if anything interesting pops out.

I’ve been following Yelp in the news for quite a while now. In particular, their Alexa stats have been impressive to watch. As an aside, Alexa stats are really interesting to follow, particularly in the 1000 to 5000 range. That’s when sites reach a critical mass of typically more than a million pageviews per month – some internally modeling we’ve done at work shows that 4500 is about the magic number for 30 million pageviews/month. That’s the "up and coming" group of sites.

Anyway, Yelp will be very easy to monetize. In fact, in my opinion, it’s a textbook play for high-value direct response advertising. The reason is that, like search, review sites are only used when people are going through some sort of purchasing cycle. And sites like these (Zillow being another example) monetize very well because they are capturing this intent and can funnel leads to other websites in a manner that results in high conversion rates.

The main changes I’d make to the site – they need to focus more on organic search indexing. So all the URLs should list the titles of the reviews. That’s a huge part of the strategy, to make sure they get high ranked pages in all the search engines – if they don’t have people specifically to guide strategy around this, they are missing out. Then secondly, they need to figure out how to monetize these users in the backend. Throwing up text ads is probably one idea – they probably want to cut a special deal with Google to pass them specific context to finely target the ads – or they can hook into a pay-per-call company that charges these businesses by dynamically rewriting an 800 number that reroutes to the company.

Either way, it’s clear that Yelp is a company to watch – not only will they have the Web 2.0 hipness and audience to match, I predict they will have strong revenue traction. If they don’t turn out to be a multi-hundred million dollar acquisition or better, I’d be disappointed.

One of the more interesting lessons I’ve learned since joining the startup world has been the widely differing perspectives on failure and innovation. It’s a tremendous source of tension primarily built on a simple stylistic tension, which seems to occur in many different companies.

On one side, you have the free-wheeling Innovators, who instinctually move from one iteration of a project to another. Their goal is to throw up lots of ideas, see which ones stick, and build on those. Of course, this process continues indefinitely, piling failure upon failure to generate the successes. The attitude here is pretty much, "We don’t know what will succeed, so let’s do something simple, learn, and go from there." This is most commonly part of the Startup-Guy archetype, someone who is constantly on the move and shooting from the hip.

On the other side, you have the Analysis guys. Their goal is to make sure that everything’s buttoned up, that decisions are made for the right reasons, and that you have a repeatable process for success. Because most large companies have "cash cows" to protect and grow, these folks are very useful to scaling out a process in order to generate large-volume, low-risk, and high-margin products. They often have a systematic way of approaching issues, and rely more on logic and analysis than on instinct.

For me personally, I lean more towards the top (the no-holds barred Innovator) than the Analysis guy. There’s obviously lots of gray area, but I definitely tends towards one more than the other. Sometimes, when the going gets tough, I can bristle when interacting with Analysis folks. They can seem unimaginative and overly focused on process – but most importantly, their focus on making things repeatable (and big) may make something shitty into something shitty AND big. This may be what happens when you stick a bunch of these people on an unproven idea – rather than focus on verifying assumptions, testing hypotheses and coming up with new solutions, instead they want to focus on scaling up the unproven idea. Often, this leads to disasterous results. Grrr!

That said, I now realize that there’s a lot of gray area, and one is not mutually exclusive of the other.

For example, take the Big Pharma drug discovery process. The way it works is, you stick 100,000 (or whatever) possible drug candidates on one end of the "pipeline," and screen them out for all sorts of different things. Does it seem like it would work? Does it seem to attach to the right "targets?" Is it toxic to animals? Is it toxic to humans? Etc. Then at the very end, after 99,999 failures, 1 drug comes out that is approved by the FDA which makes a billion dollars a day. When rolled up, all the failure costs upwards of $800MM to produce one drug.

Now, from the outside, if the Analysis people didn’t understand this process, they’d be pretty worried. After all, they’d see drug candidate after drug candidate (99,999 in all) fail over and over. It might be depressing if you didn’t know that the entire process is only meant to produce 1 good drug, and that the payouts at the end will more than make up for all the costs.

But similarly, the pure Innovator types need to understand that they are, ultimately, making a drug. And that they probably need to make 99,999 failures to make 1 success. And that there are X number of steps to go through to get to that success rate. That way, they are hitting "innovation" metrics on the way, to ensure a deterministic march towards the billion-dollar drug. If they just focused on one thing, and morphed it quickly, they might not have enough people, drug permutations, or resources to get to the success.

So ultimately, I’ve come to believe that the startup types need to think ahead and plan, at least roughly, against the major metrics of success. For startup types, that might be a rough schedule or some ideas on how many prototypes need to be generated to be successful. Or how many users need to join in order to pronounce the user mechanics as "fully baked." So for them, if they are comfortable with micro-levels of failure, they need to keep their eye on macro-level success, and what that entails.

And for the big-time Analysis types, they need to understand how failure plays a role into their overall plan. Just because you are scaling something out, and you are hiring a big team, doesn’t mean you’ve overcome the fundamental issues in your business model. Some of that requires change, failure, and innovation to drive it forward.

The most important part is for these two groups to communicate and share a common language. Just as the drug pipeline process has been able to tie innovation with expected failure rate, dates, deliverables, and financial metrics, entrepreneurs need to be able to talk about their approach towards innovation and how that ties into ultimate success. Without it, you’ll have big companies with shaky business models, or small companies with no strategic direction.

After staring at the 320 hours of paid vacation on my pay stub for months, I finally decided to take a week off of work. Now, why did I allow such an enormous amount of vacation to accumulate? Well, basically because I usually think of vacation as unnecessary and unproductive :)

So when I did take vacation, of course I used it to catch up on reading, go through an introspective bent where I evaluated where I was in my life, and other fun things like that. I’ve come to the realization that taking time off is actually very productive, as long as you are using it for the right thing. In general, it helps break up the time between long stretches of work, and forces you to think about the meta things, and meta-meta things, rather than get stuck too close to the weeds.

Rob, a wise and all-around nice guy, challenged me to think of the following, in regards to my professional life:

1. Am I getting challenged/pushed on a regular basis by my current job?
2. Am I continuing to develop new skills or augment my current skills?
3. Am I broadening the number of interesting people with whom I interact with and who will be valuable for networking as my career progress?

He also noted that within these questions, he specifically left financial rewards off. He said, for someone who is young and thinking through these questions, financial rewards will come – instead, focus on learning.

The idea, I think, is that like all "assets," people go through an "investment" phase and a "collecting money" phase. At the beginning, young people often have negative net worths because of school debts, and spend all their time learning how to be productive human beings. Now, it is true that some 20 year-olds actually create value in addition to sucking it out of the system – otherwise we wouldn’t have 28 year old billionaires – but the norm is to only start adding lots of value back into the system once you become a responsible 30 or 40 year old. Either way, the important part is to be investing when you are young, and hit your peak later on.

A corollary to this is that if you find yourself "harvesting money" too early, you are probably in the wrong job. The reason is that for most 20 year olds, you don’t have that much to give back, so harvesting money at that stage is just another way of saying "dead end job." So don’t do that.

Another way to ask Rob’s questions above, in a less systematic and formal way, is to ask, "If you had $50 million dollars, what would you be doing right now?" (Of course, substitute $50 million with whatever your "number" is – and yes, I know this question was in Mike Judge’s brilliant Office Space) Asking yourself that question frees yourself from financial constraints, and removes social status as an issue – and instead, it focuses on your "true" goals.

Then the second step of this question, of course, is that even if you don’t have 50 million dollars, as young and resourceful lads, you should be able to figure out a way to work towards that goal, regardless of your current income. This is especially true for Ivy League Microsofties, who an get a "real job" anytime they want, but somehow view their world as trapped behind a desk in Redmond.

Now hilariously enough, many people I’ved asked this question to really answer "I’d invest it," which tells you they are altogether too responsible :)

My friend Tim Higgins, whom I admire greatly, has his answer and his current life aligned completely. He worked in the financial services industry, saving money over 4 years to fund 2 years of golf. Tim’s attempting to be a pro golfer, and he would be doing this regardless of the money situation. I remember in a conversation I had with him about it, he said, it’s better to try now than when I’m older, and also that it’s better to try and fail rather than regret what "could have been" years later.

Anyway, my life is not 100% aligned right now, but will be quite shortly. But from now on I’m taking vacations more often to think about stuff like this :) Better to risk a week of productivity than a year heading towards the wrong direction.

A great article featuring The Tipping Point’s Malcolm Gladwell: The Myth of Prodigy and Why it Matters.

I remember that it was a tremendous obsession by my parents to get my sister and me into the "gifted" programs in the Seattle School District. At first, we were in a program for the top 5%, then in a program for the top 1%, and then by 7th grade, they had me apply to the Unviersity of Washington’s Early Entrance Program for kids to start college full-time at 14. There, we had people tell us constantly how we’d all change the world, and how we had so much potential, for being a bunch of "child geniuses."

In retrospect, it was all silly. It’s true that every couple years, we’d see a "true" genius come through the program that would easily outclass everyone. For example, we had a couple kids come in at 12, whiz through their classes to graduate before their 16th birthday, and finish with honors in a hard science discipline – that takes some real talent. But outside of these exceptions, 95% of the kids in the program were smart, but not exceptionally so. What they had was work ethic, highly involved parents, and that made it difficult to separate natural ability and lots of practice.

More importantly, most of the kids that then graduate from the program suffer a sad introduction to the Real World. Other than the group that go into academia (which is 40-50%), there are high levels of unemployment, or unfulfilling employment. We have people working in lumber yards, at Target as security guards, at dead-end office jobs, people sitting at home with their moms, and all sorts of other random gigs. It’s really a pretty disturbing waste of talent to see guys with 150 IQs doing hard labor for $30k/year. But it happens because of what Gladwell refers to as the "prodigy midlife crisis." Basically, people tell these kids they have all sorts of potential, but when they graduate, they’re unable to translate that potential towards something that can utilize their gifts. And more importantly, it may be that they are very good at school, but not necessarily good at innovating new things, or leading teams of people, or communicating ideas, or other important skills.

The sad truth of it is, for many of the kids that have gone through the program, it’s possible they would have had better lives by just going through high school normally, and then having a normal college experience.

Anyway, this discussion reminds me of what happens to people through their careers. At the beginning, a lot of rewards get heaped on people who are able to follow instructions well, analyze things in detail, and other individual-contributor tasks. In fact, at many companies, young people spend many years in their early career fulfilling these tasks. But as these people get promoted, the demands on them change drastically, in a way that they may not respond to well. Rather than doing the work themselves, instead their job is to help other people do, which may involve more soft skills like persuasion, information-transfer, politicking, etc.

This sometimes leads to the common concept of the "Peter Principle" which is stated as:

In a hierarchy every employee tends to rise to his level of incompetence.

This obviously means that eventually, people stop being able to respond well to the varying responsibilities they are given, and they hit a ceiling on their career.

Obviously for business prodigies – and I’ll use an example of those as obedient young Microsoft types that may or may not be thinking for themselves – you end up with young people who are kicking ass on their careers early on, but then face a "prodigy midlife crisis" as their roles change. Rather than following instructions really well, the demands are different, and they can’t adapt.

This is all related to a question that’s often posed to me – sometimes, my mom or someone in the tech industy will ask, why don’t you go to X huge, high-brand company? Or, why don’t you get Y degree? I’ve come to believe, over time, that these things are fairly similar to being a violin virtuoso at a young age.

Working somewhere like Microsoft or Yahoo only proves that you can work at Microsoft or Yahoo. You learn skills and experiences which only apply to those companies, and are difficult to generalize to all companies. People who want to learn about startups should start companies (or, in a worst case scenario, be employed at a startup). Otherwise, you’ll hit a midlife crisis too, as you realize that your 8 years of experience don’t necessarily make you better than a fresh college grad at building the next Google.

These kinds of articles are always really interesting to me: The new economics of Counter-Strike.

One of the big problems for economics, as a science, is that it’s nearly impossible to follow the Scientific Method by tweaking variables and rerunning experiments. Instead, you can only look backwards, build models, watch future data, and confirm. The weakness there, of course, is that you can never truly make sure your measurements are independent.

But video games have a lot to teach economists – through artificial like Hollywood Stock Exchange, Second Life, etc., you can adjust rules, rerun experiments, and generally have a contained little space to see how humans interact with one another. Pretty damn interesting stuff.

The most famous study I’ve seen comes from the economy of Everquest. Article here, and paper is here.

You could say the same thing about entrepreneurs and other creativity-intensive professions: 10 reasons you shouldn’t go to film school.

This made me laugh: Four Simple Steps to Becoming a Billionaire.

As many folks in usability / user experience know, don’t listen to self-reporting. People are very bad at explaining why they did something, and instead, you have to watch them objectively and study their decision-making patterns to reach any conclusions. That’s why it’s silly to ask customers what features they want and develop them specifically, without putting it through a filter of customer motivation and context.

Related to the idea that people can guarantee a string of successes is a recent blog called the Myth of the Serial Entrepreneur. How many are really out there? And how good are they compared to a layman? After all, in a hit-driven industry, it just matters that you hit it once. Plus, the difference between an "expert" entrepreneur and an amateur one might be 0.1% success rate versus a 0.2%, with the rest of it being attributed to Luck. (I’m exaggerating to make a point – proven entrepreneurs are probably several thousand times better than average entrepreneurs, as you see in other expert performance studies)

That said, whereas you can’t guarantee you’ll succeed at a billionaire level, you CAN guarantee that you won’t. I have many friends who are very smart, motivated, and capable people.
In fact, they are probably no less capable than the Mark Zuckerbergs of the world – that’s why you always see posts on that Internet that say, "Oh, I could have done that!" But of course you could have, but you didn’t. And that’s what counts.

Whereas
successful entrepreneurs took a shot with 1 in 1,000,000,000 odds, many
of my friends are stuck at Microsoft enjoying safe, reasonable
lifestyles with 0 for 1,000,000,000 odds. So there’s no possible upside
beyond their salaries. So experts might get 0.2%, amateurs might get 0.1%, but Microsofties get 0% :)

Anyway, my business plan after reading that article is to illegally acquire some energy assets in Russia and kill a bunch of people. Now I just need to find a VC to fund that…

I was having dinner with my friend Andy from college today. Andy, by the way, is an improv theater guy who also majored in Applied Math, making him the funniest math nerd I know :) Anyway, we start talking about Moneyball and quantitative approaches to traditionally qualitative things, and how sciences grow out of mythological approaches.

For the most obvious example, take astronomy. At the very beginning, you had mythology instead of science. Eclipses happen from dragons eating the moon, earth is in the center of the universe, etc. Then, over time, patterns emerge – when the sun sets, or how stars appear, and then qualitative theories can be formed. For astronomy, this is probably when people were building Stonehenge and other things which showed understanding of patterns, but not the underlying reasons why the patterns occured.

But then, as people develop the instruments and expertise to begin measuring results consistently, then these qualitative models become quantitative in nature.  Scientific models form for why they exist. And eventually, this leads to a scientific process of hypothesis, testing, and verification.

Moneyball, for instance, is a story of how baseball made that transition. At first, I’m sure people played it without keeping long, historic, records. And even when they did keep records, a random pattern-seeking person might decide that a pitcher would win games if they threw really quick fastballs, or hitter was good just by hitting homeruns. What Billy Beane was able to do was to apply scientific rigor to the process, and then shape his environment by actually making decisions in accordance with his theories.

This discussion takes us to an interesting place – the jump from mythology to science is a hugely disruptive one. And in general, it may create tremendous opportunities to build companies to capture the inefficiency of the previously flawed foundation. You could argue, for example, that Zillow is making real estate into a more scientific process, rather than one based on conjecture and human-involvement. Does Zillow represent the Billy Beane of real estate?

I don’t know what other opportunities are out there for companies that are able to exploit this – but perhaps the place to look is to understand what kinds of new measurements are taking place? What kinds of new, common-place data is now being collected, and could you apply these assets towards a previously mythologically-driven problem to create efficient, data-driven ones?

UPDATE: Additional thought – one field I’m particularly excited about seeing evolve is the social sciences. For a long time, a lot of pattern-seeking models like Freud’s id/ego/superego might have been formed for pretty silly reasons – I remember thinking Freud was all BS when I took those psychology classes in college. Economics has its flaws too, which is why it’s interesting to see behavioral economics approaches grow and flourish. Both of these might be revolutionized by the advent of two major areas: Brain-scanning devices that measure neurological responses to stimuli, and the DNA-focused initiatives like the Brain Atlas, which may drive us to build a more scientific model of human behavior.

My co-worker Basem Nayfeh made an interesting observation on YouTube versus MySpace recently – he said that he sees the YouTube acquisition as much more justifiable than MySpace for one simple reason: YouTube is a clear distruptive threat to an industry that already represents billions of dollars.

His argument that is it’ll be relatively straightforward to put together the licensing deals (being the "pipes" in the content-versus-pipes dualism) and then start tapping into the 10s of billions of dollars that represent TV. By having a close analogy in place, they can go to ad agencies and pitch something they somewhat know and understand, rather than being a purely evangelistic sale.

On the other side, MySpace is not a clear replacement for something that clearly generates revenue today. Is it just communication? If so, isn’t it just disruptive of IM, e-mail, newsgroups, etc., all things that people never figured out how to monetize? If anything, you’d expect that it might be an indirect disruption towards ALL other internet sites. Because it’s a foundation for peoples’ Internet experiences (go to MySpace first, then figure out where to go), then one could package things like video, applications, retail, and other apps that are more closely tied to monetization.

John Battelle writes on Google’s recent acquisition: First Blush on GooTube.

I have to say, I’m pretty damn surprised at the whole thing, especially
how fast it went. But in particular, I would have guessed that it’d be
Viacom, Fox, Yahoo, MSN, or AOL that would acquire them, for reasons
that I’ve stated before. To summarize my previous analysis, to really
capture the opportunity, YouTube really needs a great brand sales
organization in order to sell pre-roll and/or other brand stuff that’s
integrated into the videos. Google has the weakest team out of all the
other portals/old media. Thus, I’d assume that the synergistic value would be a lot less than someone who thinks they can capture a lot of brand dollars.

That said, one analysis of this acquisition is that it’s just 1-2% of
their market cap, and the transaction was completely in stock, so they
can gain or lose more than $1.6B if YouTube changes hands. For example,
it might be that if Fox bought YouTube, thus gaining a virtual monopoly
on video on the Internet, that might have caused Google stock to drop
$1.6B in market cap. Or, alternatively, if they can show higher growth
by buying all this traffic (and keeping the TAC they’d otherwise pay
out) then it might cause investors to get even more excited next
quarter and the stock would gain the 1-2% to offset the acquisition
cost. Either way, it might make sense.

One interesting point in Battelle’s article is the description by David
Drummond of Google (their General Counsel) that the YouTube valuation
was calculated on a "synergistic model." It may be obvious to a lot of
people what that means, but let me describe it for everyone else.
Basically, the idea is that rather than calculating the value of a
company based on their current revenues and income (of which YouTube
probably had very little), instead, you ask the question: If we bought
this company, and integrated it completely into our operations, how
much could we gain overall? Basically, you take YouTube’s revenue
potential and then amplify it against Google scale, which leads to a
big number indeed!

An hypothetical example of this: Let’s pretend that Joe can come up with a recommendations algorithm that’s 2X better any existing ones, for movies, books, and so on. Let’s also pretend that he’s making $5MM/year running this service. Now, Amazon or Netflix might come along and want to buy them. But even though they’d look at the revenue, they certainly wouldn’t pretend that they were just acquiring an additional $5MM/yr revenue stream. Instead, they’d realize that they could apply the technology to their stores and make an additional $100MM/yr. That would be the "synergistic" part of their modeling, which might get them to pay Joe $200MM for his handy new technology. Obviously I’m simplifying things here, since there’s a build or buy decision, competitive issues, and so on and so forth, but that’s just an example.

This is the kind of approach that ends up justifying
valuations like Skype as well – eBay calculated the strategic leverage
that the platform could bring, rather than a valuation based on
incremental revenue gains. So in the long run, who knows if the $2.5B price tag for Skype of the $1.6B value for YouTube are worth it – they might well be…

This is the most exuberant article I’ve read so far about YouTube: YouTube IS Wildly Profitable – No Doubts About It.

Particularly this quote:

If the site serves 100
million video streams a day, then it generates 100 million pageviews a
day.  Judging by the site, it serves 1 ad impression per page, so it
can estimated that it serves up 100 million ad impressions per page.
Looking at the kind of clients I see, and the CPM these garner, it is
reasonable that YouTube can make – every day – anywhere from $50K to
$200K (assuming $0.50 to $2 CPM).  Realistically, I would bet their ads
yield $0.75 CPM, or roughly $75,000, but of course, who am I?

This really reminds me of so-called Chinese math, the type that venture investors often see. You know, the "if we could get 2% of the total Chinese market, then we’d have billions!" top-down modeling that goes on.

Now, what *is* true is that YouTube makes $0.75 CPM on some of their traffic. The problem is, at the traffic levels that YouTube puts out, they will also get a lot of 7 cent traffic. Why is that? Well, the advertising ecosystem looks like a pyramid. At the top, you have a small number of advertisers (typically premium brand guys) that are willing to pay $15 for good space (like on their homepage) and they are willing to buy X impressions. At the next level, you have other brand guys that will pay $5, but they are only willing to buy Y impressions. This goes down a couple more levels. Then, there’s a huge amount of inventory to be had at $1, which usually go to ad networks, and then at the very bottom, there lots of impressions, in the hundreds of millions for sites like YouTube, which monetize at pennies per thousand. Each "layer" of the pyramid is structured based on CPM, and things like frequency caps that the advertisers impose. Once the publisher gets big enough, they start busting through the layers, hitting diminishing returns at each level.

If you’re a small site, you can actually get a high overall CPM since you can directly sell to endemic advertisers at $15. But the larger you get, the more "layers" of advertisers whose budgets you exhaust, until at the very end, you have a couple billion ad impressions that you hand over to CPA ad networks.

So for YouTube, the author is correct that they probably get $175,000 for the homepage. But do they get that every day, at that CPM? Maybe, but maybe not. And he’s right that YouTube sells a bunch of other inventory $0.75. But all of it? Absolutely not. Instead, the calculation is much more complex, and wholly dependent on how many premium advertisers they can get to make up the top of their advertising pyramid.

All in all, I would guess that YouTube monetizes, on average, much closer to 10 or 15 cents overall CPM. You’d want stats around user impression frequency, what percentage of their site is ad networks versus direct selling, etc., to really model it out. But my guess is, based on experience with other ad networks, that they’d be lucky to get it consistently into the double digit CPMs.

These are some of the unique dynamics of very large publishers, but also specifically of user-generated content sites which have special characteristics like huge user frequency (100+/day for some), lots of homogenous inventory, and poor user intent. If you don’t factor the above points into your calculation, you’ll be trying to sell BMWs into China expecting a market of 1.2 billion people without realizing that over 700 million of those people make $10/month.

Ars Technica article on a fascinating audience trend: Teens – E-mail is for old people.

It’s something that’s come out in interviews I’ve had with people that are 19 or younger. Rather than using e-mail, instead they use text messaging or IM or MySpace. For someone who’s an e-mail/Blackberry addict, this sounds pretty strange. But the reasons underlying the shift make sense:

1) E-mail is hard to use
Although it seems trivial to the rest of us, e-mail is actually reasonably hard to use. Does your friend use andrew1923@hotmail.com or andrew1293@hotmail.com? I forget! The last thing you want to do is memorize another arbitrary string to get ahold of people. Although address books can help, in practice, it’s slower and less convenient than other types. In our interviews with younger folks (again, 19, 20 or younger), people simply didn’t know the e-mails of their friends. Makes me wonder if all those "E-mail to a friend" features will become worthless over time.

2) I want it now now now!
It amuses me that a century ago, the only real way to communicate long distance was by letter, over multiple weeks. Then you had the telegraph. And then the phone. And now everyone has a cell phone – in fact, I remember seeing a little girl about 10 years old riding a bike here in Bellevue (an upscale suburb of Seattle), gabbing excitedly while she rode down the street. It’s as if she was practicing to be a future soccer mom in a Humvee, also gabbing on her cell phone. Either way, all the types of media and interactive communications tools make consumers more and more impatient.

E-mail has a great characteristic, at least for me: It’s asynchronous. That means, for introverted extroverts like me, if I feel like just relaxing for a bit, I can. But for other audience groups, it’s really not that interesting.

3) MySpace is the replacement
One often-known fact about MySpace is that the vast majority of pageviews for the site, other than profile views is checking your messages. In fact, if you ever hang around heavy MySpace users, you’ll hear them talk about how they "need" to check their MySpace. Some people check it hourly. Does that remind you of e-mail? Well, it is – that’s exactly how they use it. But rather than memorizing random addresses, instead, they can click on the picture of their friend (which is already in an "address book" as one of their Top 8) and easily send a message.

I’m curious, though, if this trends holds over time. After all, I don’t see Corporate America moving off of e-mail and e-mail addresses anytime soon. I don’t think Microsoft will have a big MySpace page where all the employees can look each other up (Although Fox Interactive employees might). Furthermore, universities still expose their students to e-mail. So the question is, for those students that go into college and then join the workforce, maybe they will go through an indoctrination and end up on e-mail just like before. Only time will tell.

Saw this on TechCrunch today: Controversial PayPerPost Raises $3 million. I haven’t used the service, but it’s interesting thing to how they are approaching creating a new marketplace.

Building a marketplace is hard. Not only do you have to get the chickens and the eggs to all line up the right way, you have to make sure everyone trusts each other, and also, that everyone agrees what they are buying and selling. This is defined as the "ad unit."

In PayPerPost’s case, they’ve decided that the most factors that define their ad unit are:

• Price
• Minimum words
• Dates
• Tone

(This is from the screenshot on the TechCrunch post)
In analyzing this approach, you have to ask yourself, first of all, is this going to be branding or direct response focused? You don’t really have to pick one or the other (for example, TV has branding and DR infomercials), but it’s a useful exercise to understand the primary benefits of the medium.

You could argue that it’s really part of some viral branding push. This would be a fairly hard play, for a number of reasons, but if they wanted to focus on that area, they’d need more "brand" stats. For example, they’d want the number of unique users that are reading the plug, what their audience composition and demographics are (perhaps partnering with Nielsen or comScore), etc. Furthermore, they’d need some unique measurements around the "buzz" factor of a blog, perhaps based on Technorati’s in-bound link metrics or something similar.
Those are the changes they’d probably want to make on the product side. On the business side, they’d need to only deal with very reputable blogs (and would need to prove this), and create enough relationships that ad agencies can buy lots of reach. If you can only reach 1,000 people, it’s hardly worth getting out of bed. Furthermore, under the brand model, they’ll need a little more money, just to start a New York office with agency people. (I’ve written about this before)

A much more likely scenario is for them to focus on direct response. The advertisers for DR are much scrappier, will pretty much try anything, and will probably be the early adopters for that service. Furthermore, these guys are much more likely to want to buy links from random, unbranded sites, particularly if these sites can help their Google Pagerank. (This might be the real benefit of the service, actually) In that case, PayPerPost will be encouraged by their advertisers to understand what the CTR per blog are, how much click volume they can probably drive, and then, as much as possible, they will want to know the conversion rates. Ultimately, this will make PayPerPost use a mechanism similar to Commission Junction’s or Linkshare’s, where links have clickwrappers with affiliate IDs attached to them to track all this random information. The DR advertisers will then compare the performance of these new blog ad units with search, display, affiliate, and whatever else they are buying.

Either way, it seems like PayPerPost is already on a good track – it’ll be interesting to see which side of the tracks they land, within the advertiser world. The process of defining the ad unit is probably the most important set of decisions for the company, since it’ll make or break their marketplace. Another company that has a set of interesting decisions like this is NextMedium, which is building a marketplace for product placement. (That company is a great study of ad units too – it’s clearly branding, but what do you measure? Time on screen? A-list celebs? Dimensions? etc.)

My guess is that for PayPerPost, in the success case, it’ll be direct response at first, but as they grow and add money, they’ll be able to pitch this stuff as a large, viral, "brand integration"-type ad buy to agencies. Best of luck to them!

Click here to see a bunch: Lost Garden Blog.

I was surprised to hear recently that Seattle and LA are considered the big hotbeds for video game design. Cool :) I’ve always known that with Nintendo, XBox, Valve (which is located in the same building as me!), Popcap, and others, that we had a lot of talent here.

Anyway, recently I’ve become very interested in game design as a systematic approach to creating "fun" within applications. I’m mostly interested in how these design processes could be applied to websites in order to make them more fun. It’s interesting to me that after all these years of photo-sharing, you’d get a site like Flickr that’d come out and people would describe it as fun, or like a game, or whatever.

The game community’s emphasis on rapid prototyping, user testing for "fun," designing in mechanics like uncertainty, pacing, etc., all have a huge appeal for me. I think as the Internet moves from task-oriented websites to more and more entertainment, these mechanics will be very useful to understand.

Haha, I like it:

• IDF: Iraqi Defense Force
• ADF: Apple Defense Force
• NDF: Nintendo Defense Force

Source: Picture it: fanboys fight harder – Joystiq.

Greg, a Seattle tech blogger writes: Not walloped by Wallop.

My favorite quote:

First, I have to admit, I am in no way in their target demographic. I
am too old and boring, and my dating days are way behind me.

I have two random comments about the target demographic of Wallop.

First, one funny thing about the "target demographic" of Wallop, or at least, the demographic for which Wallop has been the most successful, is that much of the userbase is in Mainland China. I’m good friends with one of the backend developers that helped build Wallop, and when they released it, immediately a huge audience converged in China. (Who knows why?) Anyway, just as Orkut eventually gravitated towards Brazil, and Friendster is the most popular in the Phillipines, Wallop had a pretty good presence in China. Now, it’s been spun out now, so who knows if it was all technology or included that user base. They were able to build a large, 6-figure user base for a research project.

Second random comment, from the user interface perspective, Wallop absolutely is confusing. But so is MySpace, and Geocities before that. I think the reason why geeks like me and Greg typically react poorly to these cluttered, messy, non-standard interfaces is that we’re heavy internet users that notice little things. We care about the user interface paradigms that emerge, since it makes it easier to locate and find information. People like us know what Orange buttons that say XML or RSS on them really mean.

But the problem is, I don’t think the vast majority of users care. In fact, many of them like the clutter. Remember that for every ugly MySpace page out there, with flashing icons and moving photo galleries and pink on red text, someone out there spent HOURS customizing that page. I remember that after prototyping a site targeted at 16-24 year old girls involved in social shopping, and showing them mockups with extra cool Google-like whitespace, they said, "Yuck. Too boring." They wanted lots of colors and random stuff in the background.

Anyway, that’s just a long way of saying "I don’t get it either" :)

It’s a book about the evolution of football: Amazon.com: The Blind Side: Evolution of a Game: Books: Michael Lewis.

For those of you who haven’t read Michael Lewis’s books, they are amazing. I first found Lewis through his book Liar’s Poker, about Wall Street. But after also reading The New New Thing (about Silicon Valley and Jim Clark) and Moneyball (about Billy Beane and quantitative approaches to baseball), he’s become one of my favorite authors.

Great BusinessWeek article on Design Schools: The Talent Hunt.
It’s interesting to see a huge trend towards people-focused product creation
in Corporate America. I think people are really starting to see design
as a core aspect of their strategy, rather than some magic you add in the last minute. Within the technology world, this is probably driven by Google and Apple, who often have LESS functionality than their competitors, but still dominate because of a superior user experience.

Anyway, I got the chance to be introduced to Stanford’s d.school a couple years back when I attended a series of talks there. They have a great approach, that’s fully interdisciplinary. Now, if they’re able to launch a couple multi-billion dollar startups from the program like Stanford’s CSL, that’ll really put them on the map :)