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Think Big. Move Fast.

In the last few years, behavioral targeting has gone from being an interesting experiment to core to the success of many ad networks. Many networks are using data collected from one site to improve the targeting of advertising on other sites. But in the past two months, both the FTC and some members of the House have discussed limiting the ability for online advertisers to do behavioral targeting.

Businessweek notes about the new FTC Chairman:

Leibowitz wants to terminate—or at least rein in—… delivering ads to individuals based on the Web pages they visit and searches they carry out. Appointed by President Barack Obama in February to run the country’s top consumer watchdog, Leibowitz has made so-called behavioral targeting a top priority.

Leibowitz is not content with advertising industry self regulation:

… Leibowitz hints that he’s growing impatient with marketers’ efforts. “It’s not clear that they’re moving far enough or fast enough, even though they’re making some progress,” Leibowitz says. He supports the controversial approach of making more of the targeted ads on the Internet “opt-in”—meaning they would require consent from Web users before collecting data—and is in talks with members of Congress intent on drafting legislation for online ads.

The member of Congress that he is talking to are members of the House of Representatives’ Subcommittee on Communications, Technology, and the Internet, who are also keen to limit behavioral targeting. Businessweek again:

Representative Rick Boucher (D-Va.), who chairs the House subcommittee on communications, technology, and the Internet, has stated publicly since February that he plans to draft legislation on targeting practices this year. He says sites should maintain plain-language privacy policies, visitors should be able to opt out of data collection, and any third-party companies working with publishers must obtain permission from Web users before acquiring or using their information.

This position has bi-partisan support. Notes Paid Content:

His counterpart on the committee, Rep. Joe Barton (DR-Texas), also said he appreciated the relevance of targeted ads, but he was dismayed at how much information is collected about him on the web without his knowledge. Barton: “I hit the delete button every week and erase the cookies on my computer. I’m always amazed at how much information is taken from me. I think I have the right to know what information websites are gathering about me and what they’re doing with it. And poll after poll shows that the public agrees with me.”

The current FTC guidelines on behavioral advertising call for  the principle of  “Transparency and Control”:

Every website where data is collected for behavioral advertising should provide a clear,
concise, consumer-friendly, and prominent statement that (1) data about consumers’ activities
online is being collected at the site for use in providing advertising about products and services
tailored to individual consumers’ interests, and (2) consumers can choose whether or not to have
their information collected for such purpose. The website should also provide consumers with a
clear, easy-to-use, and accessible method for exercising this option. Where the data collection
occurs outside the traditional website context, companies should develop alternative methods
of disclosure and consumer choice that meet the standards described above (i.e., clear,
prominent, easy-to-use, etc.)

This princple is reasonable. But as noted in italics in the quotes above, what Boucher and Leibowitz are talking about is to move beyond this principle and essentially establish an opt in process for third party cookies (which would include the cookies for all ad networks).

This is an impossible position. For a start, ad networks typically don’t have  space on a publisher page to even ask for an opt in. But in any event, opt in use of cookies will mean that very few users will allow themselves to be behaviorally targeted because defaults are almost always dominant.

Taking away the ability to do behavioral targeting and retargeting would reduce overall industry eCPMs. This would impact both publishers and ad networks by reducing their revenue. It would make it harder for advertisers to target their customers, resulting in overall higher customer acquisition costs. And it may even lead to more advertising in general as publishers try to make up for lower eCPMs with more ad units, which will have an impact on user experience.

Companies who rely on contextual targeting and content adjacency to sell their advertising have little to worry about as they do not use much third party data today. Examples include well know brands (e.g. NYTimes.com) and sites with endemic advertisers (e.g. WedMB). The big portals (e.g. Yahoo) and  search engines (e.g. Google)  who see a high enough proportion of all web users to be able to use first party data for targeting will also have little to worry about.  TBut many ad networks, and the publishers who rely on ad networks for a substantial proportion of their revenue, should be closely watching the positions of both the FTC and the Subcommittee on Communications, Technology, and the Internet.

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Insightful tweet from Charles Hudson:

Good products create value. Good biz models capture value. Good companies have both

If a company has a good product but does not have a good business model it is usually because  it has not been able to figure out a way to benefit from the value that they create themselves. There are a number of common reasons for this:

1. They don’t create enough value for each user. If the value created for each user is small, it is hard to capture much of that value because of transaction costs.

2.  It is hard to identify who will get value from the product or convince them of the value.  Even if a lot of value is being created for each user, costs of sales may end up being too high.

3. Many other products create the same value. Competition and substitution limit the amount of value that you can capture from a user to a “market price” which can be lowered by too many alternatives. This is obviously much worse if they create MORE value than your product does.

4. Users expect the value for free.  Sometimes this expectation come about because of industry norms (e.g. online content) and other times this expectation is created by early decisions that the company makes.

It is rarer to find a company with a good business model that doesn’t create value. One notable class of such companies are focused on arbitraging new marketing channels, often with a lead gen or direct response back end. These companies often feel more like “projects” than companies in that there is a natural end of life for them when the arbitrage opportunity closes. These can be terrific projects for individual entrepreneurs, but because they don’t create enterprise value in the long term, are not necessarily good investments for venture capitalists.

I prefer to invest in companies that are both creating value and capturing some of that value for themselves.

Do readers have any other thoughts on ways to create value without capturing it, or capturing value without creating it?

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I’m speaking on the VC panel at Engage Expo next month, Sept 23-24 in San Jose. I’m on at 1pm on Wed Sept 23.

The agenda is shaping up well – I’m looking forward to the social media and virtual goods tracks especially. This conference used to be called Virtual Worlds Expo, and I think the intersection of virtual worlds and social media is particularly interesting. Zynga’s Yeoville is the best example of a port of a virtual world to a social network, but arguably games like Restaurant City, Rockyou Pets, Farmtown and Farmville are all examples of asynchronous virtual worlds with a strong single player component overlay.

If you’re thinking about attending, use the discount code SPEAPERVIP SPEAKERVIP to save $200, and if you’re sure you’re going register before Aug 14th to get the early registration rate.

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Gamasutra has a nice writeup of the game design behind Corpse Craft, a causal RTS (real time strategy) game on Whirled:

In a traditional RTS, resource gathering is largely automated (players send designated resource gathering units out to harvest

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Freetoplay.biz has raw notes taken from the session on Designing, Balancing and Managing a Virtual Economy. Some good quotes include:

On inflation:

Gaia

  • did not manage economy when they started
  • want ppl to earn quickly for initial wow experience

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Interesting research noted at Inside Facebook on how different generations use social networks. Most interesting chart to me shows that Gen Y (15-29) and Gen Z (13-14) use Myspace more than Facebook.

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I didn’t make it up to Casual Connect this year, so have been scanning the blog writeups. It sounds like Jim and Greg from Kongregate had a great session about some of the Fatal Flaws of Flash Game Design.

Adrian

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Fred Wilson recently posted about the importance of SMS as a mobile interface, saying that in the debate between web apps and mobile apps on phones, you should not ignore the least common denominator, SMS.

I believe that Twitter’s

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Sunday’s New York Times Week in Review writes about the power of the brand as a verb:

Perhaps nothing better illustrates how far behind Microsoft is in the search engine wars than a recent comment by the company’s chief

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Dan Cook has a great post about business models for flash game developers over at Lost Garden. He says:

Ads are a really crappy revenue source
For a recent game my friend Andre released, 2 million unique users yields

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