Silicon Valleywood

Ad Forum Notes July 30, 2003

A couple of themes I’m feeling from Jupiter’s Advertising Forum conference.

– Buzz is good. Energy level higher than last year’s conference in the Fall. We, the industry, may have started to bounce back from the bottom.

– Panelist consensus is that Jupiter’s forecast is conservative. Jupiter is forecasting overall online ads sales to grow 10% this year, but that’s because of paid search (nearly 50% growth to $1.6B). Online display ads will be down for the third year in a row – down 6% – partly due to AOL’s old contracts. Classifieds should be up 15%+.

– Google Envy is slackening a little. But maybe that’s because we had Overture – soon to be part of Yahoo – as the keynote.

– This sounds a little 1998, but I swear, if online advertising suppliers can’t learn to speak the language of traditional advertising, they’re screwed. I can’t believe I’m hearing the same language of 5 years ago: “The Internet is different, whine, whine, it’s better than teevee. Why are you spending so much on TV relative to all the time spent online?” Well, folks, let me tell you why:

– Because you (we, the industry) can’t come up with metrics that are comparable to the ones people use to plan, buy, and measure success in traditional advertising.

– Because you (we, the industry) can’t explain what the Internet is better at than other media, but in the language that media buyers and their clients understand. It’s the audience, stupid. It’s the medium, stupid.

Here’s some hints:

– Audience: at work, richer, teens
– Medium: 2-way, real-time, market-research friendly, targetable. NOT TV.

But take those messages and “dumb them down” into the language and metrics that real, live people use to spend real, live billions of dollars. I cannot believe how little the digerati have learned about selling the medium to mainstream buyers. After five #$%^-ing years!

The Vibe at Plug.IN July 30, 2003

Slacker that I am, I’m posting a day after on some themes I picked up from Jupiter’s music conference, Plug.IN .

– I learned “it’s not the music industry that’s in trouble; it’s the record industry.” While in some sense this is correct, I kinda wonder what’s the difference.

– I think it was Forbes that first introduced The Steve Jobs Reality Distortion Field to the general public. The music industry is living in that field. The iTunes store is a wonderful thing, but it is a loss leader, and digital downloads in toto might reach $35 million this year. They’re not the salvation of the industry, but Apple’s modest success sure has psyched people up.

– The industry seems to think the threat of ripping, burning, and file sharing is just about over. See above.

– I’m in the camp that believes, if you’re going to let them pay to download, you might as well let them burn. The industry has not reached consensus on this.

– If this were a real consumer marketing-driven industry, more people would have paid attention to the Elektra/AOL/J Records case study on cost-effective online promotion than to all the talk about digital products.

– My Internet music programming panel confirmed that, although choice is good, people really, really like to hear familiar songs.

– Roxio has some cute Flash cartoons to support the re-launch of Napster (coming to your home before Xmas), but Napster 2.0 sure feels a lot like Pressplay 1.0 to me. I don’t believe there’s a lick of peer to peer file sharing involved. But, have no fear, Napster 2.0 will be true to the spirit of its inventors. Whew, I feel a lot better now. By the way, the Roxio keynote ran 25 minutes before the word “label” was mentioned. Oh, and compensating artists “will be taken care of.” Just in case you were worried that the new parent is a tech company rather than a music company.

All cynicism aside, it was great to see the digital music industry revitalized. We had a 300 seat room with SRO, and a really powerful buzz. People are talking to each other, if still blaming each other for perceived past sins. Call me a Pollyanna, but I honestly feel there’s a chance of industry consensus on rights before Congress steps in with compulsory licensing.

Live By the Numbers, Die By the Numbers July 25, 2003

A front-page Wall Street Journal story says one of the reasons for AOL’s subscriber count decline was that it did bulk deals with Sears, JC Penney, Target and others in 2001-2002 that accounted for at least 830,000 low-value subscribers, and now it’s purging those lists. The Journal’s angle is that AOL hyped its numbers and drove up ad rates and, of course, its stock price.

I guess the lesson is the online industry needs an equivalent of the magazine industy’s Audit Bureau of Circulations, or else has to pay more attention to the the ratings companies, a la television. As for Wall Street – well, they should have been using a more sophisticated tracking system all along, say, revenues in combination with time spent or unique visitors from comScore Media Metrix or NetRatings. No sympathy there.

On its Qly earnings call, RealNetworks wouldn’t give a solid subscriber count. That’s because it admitted the number might actually be down, due to normal seasonality. I buy that excuse – many subscribers who signed up because of baseball get a contract that runs through April, and doesn’t auto-renew. I expect Real will get most of those subscribers back, but it would be nice to know a bit more detail.

AOL Time Warner 2Q03 Notes July 23, 2003

As usual, I’ll stick to commenting on industry impact, rather than financial performance or accounting shenanigans.

JupTake

I still think the strategy of migrating the AOL base to a rich package of content, services, and software via 9.0 BYOA is the right strategy, but the subscriber drop-off is alarming. AOL management had to lower its outlook overall (total 03 revenues down mid-single digits) because of “limited visibility” into subscription trends.

Management is so focused on subscriptions that it risks losing sight of advertising. Yahoo had more marketing revenues ($220M to $180M) this quarter – for the first time ever. MSN doesn’t break out financial details, but is likely in the same range. Chairman Dick Parsons said, absent long-term contracts dying off, “AOL would have had a pretty good year” in advertising. I disagree.

Overall Time Warner

-Qly revenues up 6%
-Subscriptions up 8% (AOL Europe, with a favorable exchange rate)
-Advertising flat (Turner up 16%, the WB up 23%, which offset overall cable decline driven by programming ads going from $41M to $4M, and inter-company ads going from $31M to $2M)
-Content up 11% (strong movies, and music up 8%)
-Parsons says that cash flow, asset sales, and the Microsoft settlement are doing so well servicing debt that there is no more “balance sheet need” to do a Time Warner Cable IPO soon. There’s still a “strategic” need – to get cable stock “currency” to make acquisitions – but no hurry.

The details are here.

AOL

Advertising down 48%. Maintained 03 outlook of 35-45% decline. $80M of this quarter’s revenues were from long-term contracts. AOL ended the quarter with a $280M backlog of those, which is down from $420M in Q1. By the end of the year, they should be burned through.

US subscribers were down 846,000 (they were down 289K in Q1). Management attributed half of this decline to ongoing factors (increased churn, broadband migration) and half to intentional removals. 2.2M AOL subscribers use broadband of some sort – 300,000 were added this quarter. BYOA subs stand at 3.5M.

AOL did some reclassification, moving some paid subs into free trials. Subscriber count details are here.

Broadband and DTV

-136,000 net adds in digital cable. Penetration is now at 37%, up a point from last quarter and above industry average.
-170,000 net adds in residential broadband. Penetration is 16%, also up a point and above average.
-150,000+ DVRs in the field. Supply-constrained. Working out the “bugs and the kinks,” and the pricing plans. “Will be a big, big offering, but in 04, not in 03.”
-The company is testing voice over IP aggressively, and is “close to a plan” for roll-out. “By the end of 03 you’ll see us move quickly.”

Other Tidbits

Warner TV placed 29 shows in the fall season, a number Parsons thought was a record. So much for a studio needing a TV network to be successful. I love it. You know I think vertical integration is a crutch, and a fragile one.

Somewhat in that context, Parsons made an interesting digression where he said that “before regime change,” AOL Time Warner had promoted itself as a subscriptions-based media company – in contrast, presumably, to Viacom’s advertising bias, and Disney’s travel/theme park business. He likes subscriptions, but doesn’t manage them as a line of business or as a growth engine. Don Logan noted that People, Time, and Sports Illustrated had the highest priced ad inventory in their categories, and heard “no demand from advertisers to grow their rate bases.”

Happy Birthday July 18, 2003

Insofar as I have heros, according to NPR two of them share today as their birthday. Happy birthday, Nelson Mandela. Happy birthday, Hunter Thompson.

Google Envy Part XXXVIII July 16, 2003

The Journal has a front-page valentine to Google today, that tells this story about Google News.

Executives at Yahoo gradually realized they were losing their leadership in Internet search. The Google threat to other Yahoo businesses didn’t sink in until last year, when Google unveiled a Web site that automatically collected summaries and headlines of top news stories from the Web and displayed them.

In contrast to the editorial team of up to 16 who supported Yahoo News, Google had built its news site with three people. It was one employee’s personal project, built over a weekend on a whim, according to the company. After a test version wowed employees, the brass set up a team to develop it for the public.

Make no mistake, Google News is not a player yet. ComScore Media Metrix traffic data show Google News attracting 1.9M to 2.4M users this quarter and totalling 8M to 10M minutes of usage. Real news sites like CNN, NY Times, MSNBC, AOL News, and Yahoo News get 20M users and 300 to 500M minutes.

For a competive assessment of the space, see our News CORE report. Our analysis shows Yahoo News number two behind AOL News, especially for casual news users.

AOL 9.0 Previews July 15, 2003

I look back at what I wrote when AOL 8.0 debuted, 9 months ago – “slick, polished, with tons of new features…but not enough to jump-start subscriber growth…or steal market share.” Same again.

Bottom Line

However, though there’s no Alanis Morissette at the launch, 9.0 is a bigger deal. The stakes are higher, as subscribers are seriously leaving for broadband and AOL is betting big on a $14.95 bundle that combines services, software, and content marketed aggressively to its installed base. The key for AOL is to get a big upgrade – it usually does – and addict its users to the 9.0 features so they’ll need them when they move to broadband.

It’s getting to be a pretty rich package but $14.95 still seems high. AOL will be aided by aggressive DSL offers that could bring a broadband/AOL combo below $50, but those are available spottily across the country. Consumers are bound to be a little confused by the AOL and MSN big-bundle approach versus the RealNetworks and Yahoo content-only offerings. The big bundle is the right thing strategically for AOL to do, rather than carve it up into smaller pieces, given its installed base.

Many, many of the “new” features and the overall new look are already present in the 8.0 broadband edition that’s been out for months. The best new features are probably calendars, blogging (AOL calls them Journals), and the increasing depth of programming and sheer volume of stuff in the package. The biggest changes for AOL are a toe in the water of personalization, and a subtle shift that embeds Keywords into search, and represents a major philosophical change for the company.

Strategy

AOL’s four “value pillars” for 9.0 – are you listening, MSN, Yahoo, Earthlink? – are:

– Safety – AOL promotes existing parental controls and a free firewall, and has added adaptive filtering to its anti-spam efforts. Jupiter surveys show spam protection could be a differentiator. See our email report.

– Communications – AOL Journals look simple and templates produce really nice looking blogs. AOL envisions expanding the blog form to be more like conventional personal posting but with an easier tool – people will post their travel pictures etc. The digerati have blessed the tool, but they’ll bristle at the approach. Who cares? Non-members can view but not post. As for the calendars: sharing, merging, posting, publish and subscribe, etc. is a major breakthrough for AOL.

– Convenience – although it’s overemphasizing video to my taste, AOL is definitely onto the always-on power of broadband. It’s going to be pushing alerts, and has put a lot of directory like services on the Welcome Screen. As well as allowing some customization of the tool bar, AOL now has a tab on the Welcome Screen that opens up QuickView — what looks like an old Netcenter window with 27 selectable modules of news, maps, horoscopes etc. I’ve praised AOL before for its go-slow approach to personalization/customization (see here , and we’ve got a big upcoming report). This again looks like a sensible approach (I estimate fewer than 20% of users will use it anytime soon, unless AOL teaches them) though it doesn’t accommodate targeted advertising as well as the six Welcome Screens approach of 8.0. That apparently was a bust – to my surprise – but the new Welcome Screen is slightly tunable for groups of users.

– Programming – I think AOL has a real advantage here, and not because the parent company owns Time Warner assets, though that helps. AOL has always shown the heaviest editorial hand of all the major players, a good thing in my opinion. And AOL is bundling variety, which our surveys show is smarter than an a la carte approach. 30% of online adults don’t have a preference in packaging paid content (and resistance to paying is still high) but for those that do, 69% favor variety over specific genres (31%). AOL still isn’t bundling music or games, though it’s beefing up online radio.

Some Tidbits

I’ve maintained there is room to add value to search, particularly in the UI and presentation of results. I can’t tell if it works yet, but AOL is experimenting boldly here. It offers a “smart search box” which presents the searcher with relevant Keywords, sites, company info, even yellow pages links, and is localized by geography. If this works, it’s huge.

You know I love what AOL calls “expressions,” skins, themes, buddy icons, etc. But Super Buddies remind me of nothing so much as Microsoft’s late, unlamented “Clippy.” And you can’t make your own yet, weakening the individuality appeal.

AOL is giving away host-based speed enhancing (i.e., cacheing, compression) that even Juno charges for.

Guest Blog: Cross-Window Movie Marketing July 10, 2003

An entry from guest blogger, Juliana Deeks

Everyone knows that movie studios operate according to the mandate “open big
or die.” That’s why the lion’s share of the $3 or more billion spent by
Hollywood to promote its movies takes direct aim at opening weekend.

But what about after opening weekend? Donnie Darko proved that a box office
bomb can be a DVD hit. Clearly this isn’t the case with every film, however
according to at least one estimate, consumer spending to buy or rent DVDs
outpaced theatrical ticket sales by $2.3 billion last year ($11.6 billion
versus $9.3 billion).

I realize that the opening weekend spending frenzy isn’t likely to be
reverse-engineered any time soon. But isn’t there some untapped advantage
for studios to shore up promotional dollars aimed at theatrical release with
subsequent efforts to promote the home video release?

A new cross-promotional venture from Columbia House (direct marketer of DVD
and music products) and Loews Cineplex Entertainment suggests that someone
else shares my sentiments. Through this pilot program , Columbia House DVD
club members get access to movie passes good at Loews theaters, while Loews
theater-goers get to trade in ticket stubs and concession receipts for
Columbia House DVDs.

Notice I said Loews theaters, not Sony Pictures. Most motion pictures now
boast a dedicated website. Consumers who visit and interact with a film’s
website represent a target audience that’s already primed for the home video
release as well as the theatrical release. Dollars spent to
put butts in seats for opening weekend stand to go the extra mile for studios
that leverage them to put butts on couches for the DVD release.

Jupiter first wrote about extending the life of a movie site across release windows back in 1998.

Yahoo Kicks @ss July 10, 2003

Contrary to the impression you might have gotten from Wall Street’s reaction, Yahoo’s 2Q results were stellar. It had very solid growth in advertising, paid search, and consumer/small business services, decent growth in listings (HotJobs), and raised its guidance for calendar year 2003.

Some highlights from Qly concall:

– Regular old ad sales were up over 12% in the US, which means paid search was spectacular, since total marketing revenues were up 44%, to $220M. Yahoo is cagey, but said paid search more than doubled, as prices for keywords were up, and click-throughs as well. Yahoo is on pace to have larger marketing revenues this year than AOL. That is a major accomplishment.

– Fees to consumers and small business were up 43% to $70M. Yahoo has 3.5M “unique paying relationships,” up from 2.9M in Q1. Access (SBC) is the biggest service, with premium e-mail services & small business next. Fantasy baseball seems to be doing well, also. Yahoo raised its forecast for total paid relations for the year to 4.2 to 4.5M, up from 3.4 to 4.2M.

– Yahoo claimed to get $4-5 per paying user across all its services this Q, 10 times higher than the 46 cents in total revenue per UV it gets overall.

– Yahoo claims 116M “active registered users,” up from 83M a year ago.

– If I’m interpreting the numbers correctly, SBC upgrades – not total SBC/Yahoo users, but those that upgraded from regular SBC DSL – totalled 90K in Q1, down from 230K in Q1. Migration is about complete, but new customer additions are growing.

– Yahoo has $2.3 billion in cash, which is up $900 million from Q1. Not that they’re in the market for acquisitions or anything…

Chuck, Say It Isn’t So July 10, 2003

I am crushed.

Nike Buys Converse

I haven’t bought a Nike product in 20 years.

All Converse has left is niche cool, making this analysis seem ludicrous: R. J. Jones, an analyst with Delafield Hambrecht, a brokerage house in Seattle, expects that Converse will allow Nike to sell athletic products at retailers like Wal-Mart and Target, without diluting Nike’s elite image and higher prices. “This is an opportunity for Nike to take a brand to the mass-market channel.”

When I was in grammar school in Virginia, we called ’em “Cons” not “Chucks.”