Incubators That Incubate Incubators, Part II

[The below is an email written this morning by my brother who has always been very insightful when it comes to Internet and business trends. He wrote the email to a number of friends and colleagues.]

Hello. Hope you're doing well. It's me again and unfortunately, I am here today to rain on your parades, your fantasies, your business models, or your investment portfolios once again. It's happening again and so I will put up or shut up as several of you said I must back in March of 2000.

First a little history........In the lead up to March 2000, I saw a proliferation of signs that the end was nigh for web 1.0. Though painfully obvious at the time, hallucinations of the mass variety can exert quite a strong hold on one's faculties - my RealNames IPO net-worth mental masturbation calculator stands as a testament to that fact. As the Launch-Party summer of 1999 became the Fall of RealNames withdrawn S-1 registration, I knew it was over and began to search for the perfect contra-indicator that would become that final stake in the ground upon which one could sell short the entire Nasdaq with impunity. To those of you copied on this email who were actively discussing tech stocks with me back then, you will remember those days well. To those of you who were not, welcome to Incubators that incubate Incubators, Part II.

One month before the march of 2000 Nasdaq crash I made an offhand, grabass comment to the effect that we'd know the top when a venture capital firm would fund an Incubator that would incubate other incubators, which in turn would incubate web start ups. I was really just talking trash as the idea was clearly too stupid for even the worst venture firm.

Fortunately, about two weeks before the crash, Bill Romans (who is once again a recipient of my usual blather via this email) sent me an email with a link to a CNET story describing just such an incubator that incubated other incubators, which in turn would incubate web start ups.

So that's the history. So why do I bring this up today? Well, for those of you who haven't noticed, web 2.0 has gotten pretty nuts again. Silly people, doing silly "socially-conscious" social networks. All sorts of crap. And to be honest, its really quite embarrassing. Lately i've found myself laughing at start-ups more than I ever have before. The names of these things.... I mean every time I read Arrington's site I see names that sound as if they were made up by my 2 year old son's play group. Its funny and sad at the same time.

So I'm reading the SF Chronicle this morning (which by the way, is seriously the world's worst newspaper) only because I can't read the web while I'm taking my morning doompha. And there it is - its happening all over again:

http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2007/05/30/MNGHPQ3PST1.DTL&type=tech

I've got to take my daughter to school now so I'm going to let you all read this article first before I explain why James Currier and his Ooga Labs*is 2007's version of the flashing "Danger Will Robinson, Danger!" signal that we got in March of 2000 with incubators that incubate incubators, which in turn would incubate web start ups.

Talk to you soon,

Nick

p.s. and if you think I'm wrong, please tell me why.

* I have not looked up the names of the VCs who funded Ooga Labs, so apologies to any and all who may have funded this turd.

[CZ May 2009 post-script: here's the 'Incubators that Incubate Incubators' article that covered this insanity.]

Google EDU - Seeding the Future w/Google Analytics

I noticed this morning that Google is quietly funding a series of university online marketing bootcamps in which they're offering free training on Google tools - chief among them Google Analytics.

Reminds me, obviously, of Apple's EDU strategy which is paying off nicely if they're increasing marketshare is any indication.

Today Omniture rules the web analytics world, but will tomorrow see the Google Analytics sun rise?

You Now Know That I Know That You Know That I Know You Were Here

You visited my company's site, then my blog.
I know this from my analytics package.
We researched your SEM campaign to see if we might be of help.
Then you emailed in interested in our company's services.

The Minority Report didn't have to have such a bad ending...

SEM Valuations: What's Wrong With This Picture?

Back when AOL bought Advertising.com for $435M, it was said that Ad.com's revenues were $132M. 3.3X revenues seemed like a reasonable valuation, but the reality was that 75%+ of that $132M was the media buys Ad.com made on behalf of clients. Granted, in some cases Ad.com was working on a revshare basis, but if what you're doing is taking over a banner or search campaign and running it on a revshare basis and with no volume, commitments, you're really just putting your topline on steroids. If Ad.com had claimed as revenues [Revshare minus media spend], they would've looked more like a $30-35M revs firm, and $435M would've been a crazy number to pay IMO.

There's more of that air-gulping going on in SEM today. I know of at least 4 major SEM's (two in the UK and two in the States) who claim to have revenues of GBP50M, GBP100M, US$25M and $112M, respectively, when in reality their revenues (less search billings) are 1/4th to 1/5th their stated revenue numbers.

Why count search spend under management as part of your topline revenues? Well, for starters it makes you look a lot bigger than you actually are. Second, managing the search engine billing relationship makes it hard for the advertiser to ever leave you - the old ball & chain, if you will. I can't tell you the number of times an advertiser has made a decision to leave their SEM and work with us only to find out their existing SEM owns the SE account and drags their feet when it comes time to move their campaigns into a new account.

Look at the valuations for Interpublic Group, Omnicom and their competitors, and think about what happened to Priceline when they stopped counting bookings as revenues. The right SEM accounting model is to account for service and technology license fees as revenues, and nothing else.

Notes from Google Invalid Clicks Seminar

I spent 5 hours last week attending an ‘Invalid Clicks’ seminar at Google yesterday, learning about their views on click fraud as well as what they do to prevent it. We've certainly come a long way from the days of the H.M.S. Click Monkey. Here’s a summary:

Bucket o’ data
-Google said <10% (my read = 8-10%) of total clicks are determined by Google’s proactive and reactive measures to be invalid.

-‘Invalid’ means both fraudulent clicks as well as invalid clicks in the case of
double clicks, back button impressions, etc.

-Google really wants to get people thinking about ‘invalid clicks’ rather than click fraud because clicks that advertisers shouldn’t pay for encompass both fraudulent and non-fraudulent clicks. I can see their point - most clicks not worth paying for are non-fraudulent.

-Google claims that only the infinitesimally small <0.02% of invalid clicks are not detected by Google’s proactive filters or Google-initiated offline analysis. Interestingly, GEICO was in the audience and said 0.02% is roughly the amount of refunds they alone got for clicks they found to be click fraud, so that tells you the truth is probably two decimal points over (~2% IMO).

Statistical Anomaly Detection (that’s S.A.D.)
That’s the name for Google’s 100 or so filters that are applied in real-time to detect and filter out invalid clicks. The system captures “the overwhelming majority” of invalid clicks, and only a minority are captured offline by human-led analysis. [NOTE: given the amount of reactive refunds I've seen, I think reactive captures are closer to 0.2-2% than 0.02%.]

Invalid Clicks Team
36 people, which includes engineers, operations and support reps. A good part of that team was at the seminar, and they were very nice people.

False Positives
Google feels strongly that the absolute $ amount of invalid click refunds given has stayed the same or declined since 2004, all while advertiser requests have gone up by at least 2-3X. This means there’s a huge amount of false positives, a point I tend to agree with. False positives include:

a) AOL Proxy. To most advertisers, multiple clicks from one AOL IP address looks like click fraud, when in fact it’s AOL’s proxy servers representing multiple AOL users.

b) Back button. Unless advertisers/agencies use auto-tagging and URL redirects, when the searcher clicks on an ad, visits and site and then clicks the back button (think how often we all do that), to many advertisers this appears as multiple clicks from one user. And given how few advertisers are sophisticated in their approach to tracking, it’s not surprising that back button accounts for 40%+ of what advertisers initially deem suspicious activity.

More Transparency Going Forward
1)Google avowed that sometime in Q2 ’07 they will offer IP Exclusion, whereby an advertiser can specify IP addresses or address ranges for which they don’t want their ads to show.

2)Also during Q2, they will provide enhanced reporting, which most in the room took to mean ad group or keyword-level ‘invalid click’ reports.

3)As certain of Google’s search and contextual distribution relationships come up for renewal, Google is inserting in the renewal contracts language that [finally] gives them more control over who the partner can sub-syndicate to. This should help control click arbitrageurs (‘garbitrageurs’) from whom click fraud oftentimes emanates.

EF’s role in all this
Many of the attendees were large advertisers who universally complained that they don’t have the bandwidth to constantly monitor referrer logs to make sure that [(PPC traffic – invalid clicks) = PPC $ Spent], and they also said that no SEM or agency is capable of scaling to do this for them and all the SEM's other clients. This is clearly one of the reasons Google's reactive rate is so low - advertisers just don't have the time to do the digging. Good SEMs, then, must develop technical solutions that take advantage of the add’l transparency Google is set to provide in Q2. And the industry must continue to push the search engines to clear up their distribution networks - and reward them when they do so.

The Middle Ground
Lest I be called 'brainwashed by Google', I'll point out the following areas where I think Google's being 'Plexpomorphic':

1) 0.02%. No way Google's filters catch 99.98%. If the sum total of advertiser-lead refunds in my immediate vicinity is 5X that and we manage 3-4% of total search spend, then the number's probably closer to 2%. It appeared that Google spends 99.98% of their time looking at their own data; I would urge them to look at the advertisers' and SEM's data more often, even if that means paying for the privilege.

2) The real problem that needs to be talked about more is invalid distribution partners. Google *does* seem to be preparing to address this in Q2, but putting all the burden on advertisers and agencies to proactively identify low-quality distibution partners is nearly as bad as doing nothing at all about the problem. Why should it be the advertisers' sole responsibility to police such a huge network? The answer is - it shouldn't.

3) Google's PPA offering should be rolled out to its entire network, as that is the most efficient and effective way to combat invalid clicks. Google is doing itself and the industry a disservice by continuing to operate its business with clicks and CPC as a translation layer between search engine Revenue Per Query (RPQ) and advertiser ROI.


Lastly, it's also important to state Google's relative position on invalid clicks. Google is doing a much better job than any other search engine in dealing with invalid clicks, as measured by Google's relatively higher ROI, an impressive feat given how much bigger they are than any other SE. Kudos to Google for that.

I'm Winning The French Presidential Elections

The French are set to vote a new president in this weekend, and it's down to Segolene Royale and Nikolas Sarkozy. Unable to sit by without any voting power, I couldn't resist and so launched a pro-Sarkozy blog & associated PPC campaign targeting the French on Google.fr.

I launched the campaign 3 hours ago and have already gotten >1100 clicks at $0.15 CPC and 3.32% CTR.

Thank you, Google, for letting me do more than merely vote.