Technofile Europe

Taking flash mobs to a new level

In this case, for a viral video advertising stunt (for a local TV reality show):

I think the first-mover for this kind of gimmick was T-Mobile whose dancing mob took over Liverpool Street Station in London in January:

I love this kind of stuff.

Targeting video junkies with GoViral

You might be wondering why we're making investments at such a blistering pace at the moment, when many funds are slowing down and waiting for the markets to stabilise.  Part of the answer lies in our deal sourcing strategy.  Because we like profitable, founder-owned businesses in particular, we often build relationships with entrepreneurs over years before making an investment.

So as it happens, a number of those relationships came to fruition in the past 4 months, independently of the economic turmoil.  And so we closed investments in Schoolwires, Go Internet Media, Spreadshirt and GoViral (with another one to be announced next week) -- many of them companies we had known and courted for some time.

As promised in last week's post on Web cinema, here's an aside on commercial viral video.  My partner Michael Elias closed an investment this week in GoViral, an ad network for branded viral video.  GoViral is a Kennet 'sweet spot' deal -- bootstrapped, with an experienced management team (ex-Trade Doubler, Leo Burnett, Rawflow), strong commercial traction and growth, and a global market opportunity.

So what the heck is branded viral video?  You've all seen the funny, quirky videos that have made the rounds like wildfire, like Cadbury's gorilla advert and Levi's Moonwalker.   Well, there is some structure and strategy behind getting those videos to 'go viral'.  Brands have cottoned on to the fact that if their video is good enough, funny or edgy enough, it can get a lot of 'free' distribution by getting on to blogs, into emails, and onto social networks.  But to get that level of distribution, the videos need a solid kickstart.  That's where services like GoViral's come in.

GoViral built a global network of web publishers in 80 countries, where it can 'seed' its clients' videos to get the viral ball rolling.  GoViral's videos play in a YouTube-like player, directly within the content of the site.  Once consumers see the video, they can easily share it, blog it, rate it, etc.  The best videos get the most distribution and the most views.  GoViral tracks the video's voyage across the Web and delivers detailed performance reports back to the brand that originated it. 

The key is to work closely with brands to make sure only the best videos with viral potential make it onto the network.  That effort has produced gems like this one, a jam session of extreme street football in Mexico:

But this approach can also be applied to traditional high-quality commercials like this one for Nissan Qashqai:

Or they can be low-budget guerrilla projects like the dynamite surfers from Quicksilver:

When it works, the results can be astounding.  As reported by GigaOm, the Quicksilver video above got 20 million views and generated £68 in sales revenue for every £1 spent on the campaign.

Viral video seeding is in its infancy, but big brands are jumping on board (and not only with video, but also games and widgets).  Check out one of my favourite campaigns, Virgin Media's Right Music Wrongs. 

My tech market predictions for 2009

For some reason I’m always closing deals in December/January, so my blog runs dry for a while.  But here they are, late again – my tech market predictions for the interesting times we call 2009:

1. SaaS vendors who are not already at the inflection point of positive cash-flow and controlled churn will go bust, unless their investors have very deep pockets indeed.  It will be hard to sell your way out of this slump. The economic environment plays to SaaS, but most of the business models ain't there yet.
2. On the other hand, outsourcing will come back into favour once the market settles a bit.  And it will be cheaper & better than ever, thanks to SaaS-style delivery of business apps built on VoiP communications platforms like Intelepeer. 
3. Ad-supported digital media sites will see a massive shake-out -– few generic newsletters or blogs will survive on their own.
4. Social networks as a category will see their values collapse, and many will disappear.  Even the Facebook gorilla will never grow back into its $15bn valuation, no matter how many whoppers.
5. Microsoft will continue to lose share in the browser market.  By integrating more apps into Gmail, Google is creating a platform that threatens Outlook/Exchange.  For this reason Microsoft will use its massive cash pile and low valuations to make defensive acquisitions, like Xobni.
6. CPA and creative rich media ads (games, viral video) will outperform other types of online advertising.  Expect consolidation as the few online ad networks with cash try to acquire growth.  Targets will include disruptive networks like Specific Media and online lead gen specialists.
7. Consumer appetite for innovation will slow, compounding Apple’s challenge in dealing with a sick Steve Jobs.  Since we’re still absorbing last year’s fabulous gadgets, the company has some time to develop a new roadmap.  But don’t be a shareholder while they figure it out.
8. A lot of local newspapers and offline magazines will disappear in 2009, which is kind of sad.
9. Project management tools like Daptiv, and construction industry SaaS vendors like BiW and others may well thrive, as governments pump gazillions into ‘stimulating’ infrastructure projects everywhere.
10. The shake-out among European VCs will continue at its glacial pace.  Timing can be a real bitch, but this downturn is all about the moolah.  Those with  cash have a shot at a winning strategy (tricky though it may be to find).  Those who don’t, won’t get to play.

As always, one item for the wishlist (I didn't get my dumbed-down cellphone last year...):

• Somebody fix videoconferencing, puh-lease!  There must be a better way between Skype video and a $150k TelePresence implementation from Cisco.  This would be a great time to go to market with a Polycom killer!

Finally, I still see this is a great time for European entrepreneurs.  In fact, many will fare better in this market than their US peers, having always been more frugal and used to operating with fewer financing options.  The maturation of serial entrepeneurship in Europe will continue.

Stay tuned for news from the Mobile World Congress (fka 3GSM) next week...

It's education, stupid!

In the past few days we announced two new investments in the US: Schoolwires and Go Internet Media.  Both target the education market, albeit in very different ways:

• Schoolwires provides web-based content management and community management applications to the K-12 market.  Its SaaS product is used by over 4,000 US schools to manage their websites and Intranets, to enable collaboration among parents, students, teachers and administrators, and to manage administration taks and the distribution of learning materials. 

A renewed focus from the Obama administration on the modernisation of primary schools will benefit vendors like Schoolwires, whose on-demand solution is a low-cost way for a school to benefit from Internet-age technologies.

Schoolwires has a great management team, who've done it before as part of Sungard Systems' higher education software business.

• Go Internet Media is an online advertising network that specialises in delivering applicant leads to higher education institutions across the US.  The company operates information websites such as searchbydegree.com and freeeducationguide.com that help consumers find the right online or offline university and guides them through the application process.

In the current economic environment, demand for higher education is booming, as people decide to ride out the recession by returning to school, or look for new skills to adapt to changing markets.  The fastest growing segment is the new crop of for-profit universities (operating online and offline) which are expanding around the country and acquiring new students globally using the Web.

Both companies are good examples of the type of business we love to invest in: they are profitable, bootstrapped, founder-owned companies that have demonstrated an ability to grow rapidly using little or no external capital. That puts them in a strong position to accelerate growth with judicious use of our investment capital.

Congratulations Eric, Javier and Gus!

Silicon Alley Insider annoys its readers

Silicon Alley Insider tops my list of clever desperate but obnoxious attempts to increase their ad page views.  In this intriguing "Top X List" post on the VCs most exposed to Web 2.0 companies, you can't actually get to the list itself.  No, you're forced to click on "START HERE" and to turn pages on each entry, accompanies by a new advert.  Give me a break.

I'm taking bets on the next tech blog site to go under...

Scoring my 2008 predictions

Well, 2008 is over and what a year it has been!  It's time to score the predictions I made a year ago and to start thinking about a new set of predictions of 2009.  As one of our portfolio company CEOs wrote to me today: "2009 should be a hoot!"

Before I get to the hoot, let's see how I did with 2008:

1. A combination of US recession and the waning efficacy of online ads will hit the Internet advertising industry hard.  MOSTLY TRUE, although the final numbers are yet to be released. I suspect the combined slowdown of Q3 and Q4 will lead to a nearly flat year for offline advertising and a lowish growth year for online, with the bulk of the spoils going to performance-based networks like Google and specialised online lead gen companies like Zieltraffic (for financial services) and Internet Media Group (for online education).
2. The Structure of Networks -- social and otherwise -- will migrate to the core of the Web, replacing the Structure of Documents on which it was originally built (HTML and all that).  Someone will figure out that applying the Google PageRank concept to networks of people is even more interesting: if we can identify influencers and how information flows among them, we can really start targeting campaigns. NOT YET REALLY, although the trend is clearly in this direction.  During the current downturn, a lot of investment will go into increasing the efficacy of online advertising.  Facebook founder Mark Zuckerberg understands this clearly, though he hasn't worked out quite how to monetise the idea.
3. 2008 will the year of the Return of the ERP Vendor.  SAP, Oracle and the midmarket vendors will make progress with their own SaaS offerings and will shrink the valuation gap with the pure-play SaaS vendors.  HALF TRUE, the valuation gap has shrunk from 3-4x revenues to 1-2x.  But this has more to do with the general bearishness of the markets than with the success of ERP vendors' SaaS offerings.  Keep an eye on Oracle, who are doing their best to steal some of the Web 2.0 sizzle with new offerings.
4. The Web 2.0 financial bubble -- fuelled by VC cash being round-tripped between startups buying and selling ad space -- will pop as a result of the weaker ad market and the failure of 100s of undifferentiated 'feature' startups to gain traction.  TRUE, here's a list of 10 in particular, but the roster of the dead runs into the 100s with more to come.
5. The mobile web will continue to be stymied by the difficulty of discovering content on mobile devices.  iPhone and other large-screen devices will help commuters surf the old Web, but mobile browsing won't take off until someone invents a new search paradigm that works on mass market mobiles. TRUE.
6. As a result the mobile advertising market will fail to take off... yet again.  TRUE.
7. What on earth is UWB?  Anyone remember? Anyone care?  STILL TRUE.
8. The success of the Nintendo Wii will spark a whole host of new physical interactive video games, providing a boost to vendors of chips to the console companies.  FALSE so far. Wii continues to rock'n'roll, and the imitators are far behind.  But in a bow to the new innovation leader, both Sony and Microsoft are working on motion-sensing controllers for their PS3 and Xbox platforms.  Meanwhile the Wii continues to stoke the creative juices of independent developers -- here are Wired's faves.
9. Social networks will see huge monetisation efforts and some applications and ad networks will make a financial killing.  But their performance will be erratic and useage of networks will be highly volatile as consumers get tired of being poked, zombied and voted HOTorNOT. I think this is TRUE.  Social networks (broadly defined and including YouTube) have failed to live up to their lofty valuations, which were based on unrealistic advertising yields. The advertising bust has blown this issue wide open.
10. Some element of Open Source or "free" distribution models will become part and parcel of every software vendors' go-to-market strategy. Again, NOT QUITE YET.  This will take more time.
11. [Bonus, more of a hope than a prediction]: 2008 will mark the return of the Basic Business Phone, and it will be a runaway bestseller.  Nokia or someone nimbler will launch a high-performance phone that makes phone calls, has a long battery life, global coverage, and a simple, fast interface.  And absolutely nothing more!  I so wish... I'M STILL WAITING!!

That makes it 6/10, which is worse than last year's score of 7/10.  I need to steer clear of technology developments themselves -- those predictions always underestimate how long it takes for innovation to find the right application and to get adopted...  Stay tuned for my shot at 2009.

Can Obama's use of mobile marketing tilt it?

This year's US presidential campaign is delivering a lot of firsts: the first black candidate into the final stretch, the first race where online videos of full speeches are overshadowing 5-second soundbites on network TV, and the first race where mobile marketing may become a decisive factor.

Obama's use of email and mobile marketing is tied to his very successful effort to bring out the youth vote.  In the knowledge that US elections are swung by a small number of marginal voters, his campain team have brought hundreds of thousands -- perhaps millions -- of new voters onto the electoral rolls through a combination of grassroots registration drives and viral marketing using all the newfangled Web 2.0 Web 1.0 tricks.  (I haven't seen widgets and mashups yet, but effective use of online marketing and social networking).  Obama now has 1.5 million supporters on Facebook (vs McCain's 250k) as can be seen in the extraordinary graph on the right.

Obama isn't the first to use digital media in a campaign; Howard Dean is credited with pioneering use of the Web and online technologies in 2004.  But in terms of scale, the Obama campaign is pushing the limits.  Three million people supposedly received the much-hyped text message announcing Obama's choice for Vice President 10 days ago.  But rumour has it that the same number or more did not receive the SMS they signed up for due to technical glitches.

Even though the VP announcement leaked to the media before the texts went out, the strategy worked a charm, as most people were asleep when CNN got the scoop at 1am, and woke up the next morning to find Obama's text message or email.  As a list-building exercise, the text ploy was brilliant -- millions signed up on Obama's website to receive the text, not only confirming their email addresses but also providing their mobile numbers and zip codes to the Obama campaign.  How much is a cleansed, geo-targetable email/mobile marketing list of several million Americans worth?  If it helps bring out a few hundred thousand additional voters on election day, incalculable.  In a recent post, Om Malik describes some of the ways the campaign could use highly targeted geographical marketing in the coming months.

Team Obama has not been shy in spending money on cutting-edge technology.  They bought CRM tools from RightNow Technologies for managing email responses and its website FAQs.  To manage internal communications and coordination, they are supposedly using a collaboration/wiki platform from Central Desktop.  For the SMS campaign, they gambled on two small companies: technology provider Distributive Networks (16 employees) and venture-backed SMS aggregator SinglePoint.

As the campaign enters its final phase, the Obama camp should think carefully about over-use of these new channels.  Just like corporate marketeers have discovered, it's a fine line between an effective volume of digital communication and an annoying volley of spam that turns consumers off.  Since the VP announcement, the Obama campaign has been bombarding its supporters with daily emails linking to videos of speeches from the Democratic National Convention, and soliciting donations.  They would be wise to cool it a bit to avoid turning existing supporters or independents off before election day. 

The end of web advertising as we know it?

If you're interested in the future of online advertising, John Hagel had an excellent, thoughtful post on the subject about 10 days ago (I know, I'm running a bit behind the blogroll these days).

In his post, John cuts through the confusion created by the contradictory market trends that are being picked up by the media, typically one at a time:

• the cyclical downturn in the general advertising market;
• the continuing explosion of new web advertising platforms like social networks and video;
• the development of great new targeting technologies; and,
• the increasing fragmentation of our attention across media, which reduces the effectiveness of online ads.

The markets are reacting.  Google shares are down 37% since the start of the year, on fears of a slow-down in online advertising and waning effectiveness.

John points out:

Here’s the danger: we may become so focused on the recent growth in online advertising that we dismiss any short-term slowdown in spending growth as a purely cyclical phenomenon. In the process, we may miss the longer-term, and ultimately far more profound, impact of the diminishing returns that online advertising is already beginning to experience.

Think about the impact on traditional advertisers.  Just as they are about to embrace the Internet; just as the large brands are starting to shift more bucks into banner ads and online video campaigns; just as the P&Gs and Unilevers and BMWs are coming round to the view that the Web is the future of advertising; just then.... the yield drops and Web ad effectiveness is thrown into doubt.  Microsoft (oddly) captured the problem nicely in this funny video (thanks Nic, good find):

There will be a lot of click-through soul-searching and efforts to tweak ads to recapture our attention, but the truth will be inescapable: static, image-based advertising (eg banners, etc) will be on the wane just as these advertisers get it together online.  Some will be scared off, a few will charge ahead into the next marketing frontier: interactive marketing games, clever video ads, and vague concepts like influencer marketing, social marketing, collaboration marketing, and so on.  These innovations represent huge future advertising opportunities, but they are still nascent.

Future advertisign effectiveness will be about influencing influential people, and exploiting social networks to spread messages.  It will be about the confluence of marketing, public relations, and corporate social responsibility, and about mastering some guerilla tactics to get the word out.  And that's not likely to be your current ad agency's core competence.  As a result, you can expect some serious churn of people and companies in the advertising industry before the new paradigm is established.

Specific Media gets Europe with Adviva

Yesterday we announced the sale of our portfolio company Adviva to US-based online advertising network Specific Media.  The strategic rationale is straightforward: Adviva will be the European beachhead for Specific Media, the fastest-growing advertising network in the market (and probably the fastest-growing business I have ever come across). 

My M&A banking years have instilled a healthy skepticism about mergers between similar businesses (as opposed to acquisitions of point technologies), but in this case, the two companies really are a perfect fit.  Both run campaigns for top-end brand advertisers on small, high-quality networks of websites.  Both have been using innovative targeting technologies to generate outsized results for advertisers, whether on a CPA or CPM basis.  And while Specific Media's network is US-centric, Adviva's network is entirely European, so there is virtually no overlap.

The rapid rise of Specific Media and its move into the European market symptomise a new era for the online advertising industry.  This is an industry with issues.  Online advertising growth has been torrid but is slowing. The US is in recession, which will hit the overall advertising market hard.  The effectiveness of online ads is being questioned as click-through rates on banner ads decline, and consumer audiences are increasingly fragmented across social networks, blogs, etc.  The supposed 'next frontiers' of video advertising and mobile advertising remain immature and are simply not delivering results to the many investors who piled into those markets.

Many ad networks have grown fantastically on the back of this booming market. But the pace of growth camouflaged the fact that their offering was difficult for brand advertisers (BMW, P&G, et al) to buy -- the audience segmentation does not match what they are used to in the offline world (A-B-C, etc), and it was hard to measure true effectiveness in spite of (or because of) infinite volumes of data.

Many technology vendors and ad networks made things more difficult by barraging advertisers with fancy new products: behavioural targeting, contextual targeting, performance marketing, etc.  It has taken time for the two sides to learn to speak a common language. 

This is where Specific Media's approach really stands out.  The company makes it simple to advertise on the Web.  It boils down to this: tell us who you want to reach and we'll find them for you.  Rather than sell new targeting technologies, Specific Media sells the audience and uses all the available targeting technologies in the background to deliver.  The advertiser gets the audience he wants, and Specific Media gets a margin as good as its own opimisation technologies allow.  Thanks to the huge reach of its network (140m users, just behind Google, AOL and Yahoo), it has enough data on web surfers to deliver the most demanding, targeted campaigns -- always a struggle for the smaller networks.

These are interesting times: a new generation of online ad network is coming into the market just as contradictory macro trends buffet the industry (US recession, declining ad effectiveness vs better targeting technologies, continuing $$ shift from offline to online).  More on this later. 

MSFT unsolicited bid for Yahoo

At $45bn, Microsoft's proposal to acquire Yahoo must look like a godsend for Yahoo's beleaguered shareholders.  And at a 62% premium to Yahoo's last close, Steve Ballmer is clearly hoping to deliver a 'knockout' bid that the board can't refuse.

Oh, and just in case Yahoo's 10-person board (all but one of whom are independents) think they might softpedal the approach, Microsoft released the full text of the offer letter sent by Ballmer to the board, which is definitely worth reading here.  The timing is perfect, cruel but fair. Yahoo will find it difficult to resist.

In Ballmer's passive-agressive letter to the board, he berates management for failing to deliver growth after rejecting a merger with Microsoft a year ago.  But what's really interesting is the extent to which this is so explicitly a defensive manoeuvre against Google and in particular its scale and capital spending capacity.  Ballmer writes:

While online advertising growth continues, there are significant benefits of scale in advertising platform economics, in capital costs for search index build-out, and in research and development, making this a time of industry consolidation and convergence. Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition. Together, Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers, and publishers.

For Yahoo's shareholders this is a great face-saving exit from a strategyless future.  But whether the combination will in fact create a viable competitor to Google in online advertising remains to be seen. 

I'm not dabbling in equities at the moment, but if I was I'd be long YHOO and short MSFT.

Web marketing 3.0

I'm glad to see that more and more consumer-focused companies are giving their marketing teams the creative freedom and financial muscle to exploit the Internet to its fullest.  First came the movie and TV promoters with Internet-only trailers, treasure hunts and games, like Simpsonize Me.  Now the most prosaic (sorry P&G!) of products is getting a proper Internet makeover: the razor.

What do you get when you cross the Wilkinson Sword with Fight Club, a buff baby and hardcore online gamers?  Not this:

   

But this:

 

It's Fight for Kisses.  Check it out.

Wimpy advertisers

There has been another headline-grabbing tussle over Internet advertising recently.  As reported, Vodafone announced it was pulling its ads from the world's fastest-growing social networking phenomenon, Facebook.  Apparently it found some of its campaigns appearing on pages about the pseudo-fascist British National Party.  Voda was quickly followed by FirstDirect, the Halifax, Pipex, Virgin Media and the AA, according to the BBC.

For me this story highlights two things:

1. The continuing naivete of the large advertisers, who still treat the Internet as they do print media, assuming an indelible link between a page's content and its adverts.  This belies the fluid, fast-moving and massive-volume nature of the Internet.   This is the fastest-growing medium in history, and you're either a part of it (warts and all) or not. 
2. The importance of better campaign control.  In fact, the technology exists to control precisely where adverts appear.  The Internet has gotten a bad reputation among brand advertisers thanks to unscrupulous ad networks and the rapid growth of user-generated content sites like blogs and social networks, where content is impossible to control.  This has in turn created a space for quality networks that make campaign control and brand protection a top priority, like Adviva among others (Disclosure: Kennet company).

The Internet is the fastest-changing, most far-reaching medium ever, so advertisers can't afford not to be a part of it.  Of Facebook's 35m+ active users, I'm sure less than 0.001% have ever visited the BNP's home page.  It is effectively irrelevant.   This medium requires a more relaxed attitude to content risk, and a smarter approach to campaing planning & control.

Not all eyeballs created equal

There is no let-up in online advertising deal activity this week, with AOL acquiring Tacoda for a rumoured $275m.  This follows hot on the heels of a series of ever larger acquisitions in this market, as I wrote about here and here.  The Tacoda deal is particularly interesting because it represents the mainstreaming of behavioural targeting, technology which allows advertisers to target consumers based on their Internet behaviour.

Both Tacoda and its competitor in the US, Revenue Science, began by developing technology and trying to licence it to websites and network owners.  This proved difficult and so each eventually set up an independent advertising network, both to prove the technology and to generate revenues.  In Europe, many of the existing ad networks use behavioural targeting techniques to some extent. 

The key to effective targeting is having enough data about user behaviour.  This can only be collected from within a network as the user travels across sites.  The more specific the network sites are the more they reveal about a user.  AOL should be able to get a very rapid boost in its ad conversion rates by applying Tacoda throughout its Web properties.

In Europe, Adviva Media [disclosure: Kennet portfolio company] combines behavioural and demographic targeting to deliver very narrowly targeted user groups for advertisers.  This reflects a broader trend in the market: advertisers' increasing search for highly specific traffic. 

In this week's VentureBeat, Jeremy Lieuw demonstrates how the value of some types of ad networks is increasing, at the expense of generic web traffic.  Underlying his analysis is a review of some lesser-known recent M&A deals, like Hachette Filipacchi buying automotive network Jumpstart, and BSkyB's purchase of Aura Sports.  This is the critical weakness in the business models of the large, volume-driven networks like Ad.com, whose CPM rates are destined to decline further and further unless they can effectively segment their users.  For content-driven networks -- like AOL and Yahoo -- and specialised networks like Adviva, it represents an opportunity to drive higher CPM rates and to deliver more effective campaigns.

My prediction is that the next wave of deals in this market will be all about acquiring specialised, targetable traffic.

Making bucks off widgets

There was an excellent post last week from David Hornik on the burgeoning Widget Economy, which is rapidly becoming the basis for content syndication on the Web and is creating a significant new layer of complexity (and opportunity) for monetising web traffic.  It's a must-read for anyone thinking about funding their web business through the advertising model today.

Online ad market is smokin' (con't)

And the deals just keep on coming...  Having supposedly lost out in the bidding for both DoubleClick and 24/7 Real Media, Microsoft has agreed to acquire aQuantive for a cool $6bn, which represents a massive 85% premium to its Thursday closing price.  That's roughtly 12x 2006 revenues or 60x EBITDA.

This deal basically completes the elimination of independent ad-serving technologies with any market share.  Ad serving on the Internet is now controlled by Microsoft (Atlas), Google (Dart) and AOL (Ad-Tech).  It also brings Microsoft further into the digital marketing and advertising world than it perhaps wanted.  aQantive includes several digital marketing agencies (Avenue A, Razorfish, DNA), as well as two performance-based advertising networks, DrivePM and MediaBrokers in the UK.

The consolidation continues...

Online ad market is smokin'

With today's announcement that offline ad agency group WPP is acquiring 24/7 Real Media for $649m, or approximately 3x 2006 revenues (net of cash) it is becoming clear that the convergence of online and offline advertising is in full swing.  This deal is the latest in a string of acquisitions highlighting several competing trends:

1. Offline/online convergence -- It no longer makes sense for an ad agency NOT to have full, credible online capabilities, hence WPP/24-7 and Publicis/Digitas.
2. Consolidation in the ad serving technology market -- And then there were only three ad servers: aQuantive (acq Accipiter), DoubleClick (acq Falk eSolutions), AOL (acq Ad-Tech).  Except of course the open-source underdog...
3. Network scale plays -- This is where the really big bucks are made, by merging search and display ad networks (Google/DoubleClick), and by combining publisher inventory with a liquid market for ads and traffic (Yahoo/RightMedia).

Henry Blodget provides a handy summary of the recent deals in his blog here. 

This is good news for many of the technology and services companies that have lived through the lean years and built quality businesses.  I'm particularly glad to see a number of European companies among the acquired (Falk, Ad-Tech, Neue Digitale).  Because the European market of advertising networks and SEO/SEM firms remains very fragmented (and the US players have comparatively low penetration), expect to see more transatlantic acquisitions in the coming months.

The banner is back!

The bidding war between Microsoft and Google for Doubleclick highlights a critical shift in the online advertising industry. Search advertising has matured and Google is the undisputed category leader, enjoying phenomenal margins (or monopoly rents as some would argue). Now Google is paying over $3bn to own the largest provider of ad serving software. Why?

On a public conference call to discuss the deal, Google CEO Eric Schmidt stated that a strategic review of the market showed that the display advertising market was bigger than they had previously thought.

Fred Wilson rightly points out that the search advertising market is now so efficient that there isn't much room for advertisers to increase their exposure without paying more for keywords than they're worth. But display advertising inventory is nearly infinite on today's Web -- the only question is how well you can target the ads and meaure their effectiveness. Brand advertisers are starting to realise this, and are getting help from ad networks designed specifically for them, like Adviva (disclosure: Kennet investment), to ensure their ads are placed on reputable sites and targeted to the demographics they want.

As I wrote here (somewhat hopefully) a year ago, more sophisticated display formats (eg, video) and better targeting using behavioural and contextual technologies are drawing previously hesitant advertisers to the web. This will continue to sap the TV and print businesses of ad dollars. We could see a new boom in online advertising as these technologies mature. Google has placed its bet.

And Hellman and Friedman, the private equity firm that owned Doubleclick has wrapped up one of the most profitable tech buyouts ever -- with a gain of perhaps over $3bn. Now that took guts. Just in case you still thought the tech industry wasn't ready for buyouts...

Britain as the world's hottest online advertising market?

The Economist last week published a surprising article suggesting that the UK has surpassed the US and other markets in the growth and maturity of its Internet advertising market.  Statistics cited include:

• UK residential broadband penetration of 47% (vs 44% in the US)
• The average Briton spends 23 hours / week online, vs 14 hours / week for the average American (can this be true???)
• Internet accounts for 14% of advertising spend in the UK, vs 5% worldwide (13% in the US)
• Online advertising growth in the first half of 2006 was 40% in the UK (37% in the US)

I believe the growth rates because we are seeing it clearly in online advertising related companies, including ones we've invested in, like Adviva.  But an interesting result of this hypergrowth is that both traditional advertising agencies and Internet firms like Google are increasingly using the UK as a test-bed for new twists on the online advertising phenomenon.

So, for example, Google struck a deal with BSkyB which will eventually try to bring Internet and television advertising programmes together.  The key insight here is that with Tivo-like set-top boxes, "stored television" is looking increasingly like the Web.  Hence, Google's ad targeting technology can be used to deliver specific ads to consumers from their TV hard drives.

Meanwhile, a serious scramble is on to copy the hugely profitable online advertising model on the mobile Internet, witness the recent alliance between Yahoo! UK and Vodafone, and the re-emergence of start-ups we had long given up for dead, like Flytxt, Enpocket and AvantGo.  One of our portfolio companies long active in the mobile content delivery market, Volantis Systems, is being asked with increasing frequency to help content owners (such as CBS TV) and operators figure out how to deliver advertising to mobile phones.

These trends have not gone unnoticed among European venture capitalists, as Nic Brisbourne pointed out recently, citing funding rounds for companies like YOC, ScreenTonic and Txt4.  I don't believe that these (mostly small) investments in Europe qualify as an overfunding of the category.  Most of the targets seem to be mobile marketing agencies reinventing themselves as mobile advertising companies.  I would have thought that mobile content delivery platform providers, with existing operator relationships, are better placed to capture a chunk of the mobile advertising dollars as the ads get delivered over their systems. 

Similarly, some equivalent of online advertising networks ought to be relevant in the mobile world as well, as advertisers seek to target particular groups of consumers.  Will the existing ad network guys, like Ad.com, ValueClick, Burst!Media, be relevant in the mobile ad world?

Om Malik has initiated cautious coverage of the mobile advertising topic on his blog here.  I suspect he does not quite agree with Google CEO Eric Schmidt that mobile advertising will be so profitable that cellphones should become free.  It's a great, self-serving idea (more free platforms on which to deliver Google ads), but it might take a while for the operators, the content owners and Google to work out how to divvy up that pie.  Now THAT will be a protracted negotiation...

Wanted: brand advertisers on the Internet

We recently invested in Adviva Media, which runs an online ad network from its London HQ.  What got us really excited about Adviva is that its founders are focusing on the next wave of advertising spend to come onto the Internet.  The next wave?  Think of it this way: the first wave -- which is making all those Googleheads rich at the moment -- are the direct-response advertising dollars.  This is where financial services sites pay Google $20 for every click on a search for "mortgage", or $0.69 for "flowers".  This phenomenal model of pay-per-performance advertising has allowed millions of businesses -- large and small -- to calibrate precisely customer acquisition costs and margins.

But even these billions of dollars in online advertising spend only represent 6% or so of the overall advertising market (and in Europe it's probably only 3-4%).  So why is everyone still spending money on TV, print and radio where we know--famously--that half of ad spend is wasted, "we just don't know which half"? 

Well, by far the largest piece of offline advertising is brand advertising, eg companies trying to make you feel warm and cuddly about Volvo, or Head & Shoulders, or Intel Inside.  These ads are meant to be purely brand-enhancing and not to generate an instant purchasing decision at all.  And so far, these types of ads have been slow to migrate onto the Web.  And this is in spite of the fact that we can better target, track and measure ads shown to web browsers than we can in most of the offline media!

One of the big reasons for the slow acceptance by brand advertisers of the Web as a medium is that they fear the potential damage to their brand if ads appear close to objectionable or controversial content. But this concern is rapidly dissipating, as new targeting technologies (contextual, behavioural and other buzzwords) make it easy to control ad delivery, even on blind networks like Adviva's.  Unlike in the direct-response advertising market, where click-volume is the only thing that really matters, in the brand advertising market it's all about quality.   Advertisers will look for very high-end creative content, tight control over placement, and real demographic targeting that maps onto their traditional target market classifications.