Yesterday's Wall Street Journal featured an excellent editorial by Esther Dyson, a longtime, well-regarded observer of technological trends and developments for nearly 30 years.
Her topic was the proposed combination of Microsoft and Yahoo, and its effect on Google's advertising business. She began her piece with,
"While the big news in the online world focuses on Google, Yahoo and Microsoft, a more profound revolution is taking place on the online social networks: The discussion about privacy is changing as users take control over their own online data. While they spread their Web presence, these users are not looking for privacy, but for recognition as individuals -- whether by friends or vendors. This will eventually change the whole world of advertising."
I've always liked Ms. Dyson for her ability to objectively and clearly explain evolving trends in technology, stretching all the way back to when I worked on digital PBXs and business strategy at AT&T in the 1970s and '80s.
As I no longer specialize in telecommunications, computing or online business, per se, Ms. Dyson provides an easy way for me to catch up on these sectors. Her identification of the differently-developing and increasingly-important social networking area is of interest to me.
She continues in this vein in her editorial,
"The current online-advertising model will become less effective, even as it gets increasingly sophisticated. New players are emerging to devalue the spaces that the ad giants are currently fighting over. Companies you've never heard of called NebuAd, Project Rialto, Phorm, Frontporch and Adzilla are pitching tools to Internet service providers that will enable them to track users and show them relevant ads. This approach (called behavioral targeting and already in service by ad networks that track users through so-called tracking cookies) undercuts traditional online publishers, who employ content to lure users and to sell adjacent ads. Now, the ISPs can sell advertisers direct access to the same users.
Take user number 12345, who was searching for cars yesterday, and show him a Porsche ad. It doesn't matter if he's on Yahoo or MySpace today -- he's the same number as yesterday. As an advertiser, would you prefer to reach someone reading a car review featured on Yahoo or someone who visited two car-dealer sites yesterday? His identity is still private: The ISP and behavioral-targeting networks don't know 12345's name and don't care. They just know what they think he wants.
This market will get more competitive, and users will be barraged by ads to which they will pay less and less attention. Call that public space, a world of billboards and cacophony. Even though the ads will be more "relevant" than ever, users will increasingly tune them out.
Now consider the new world of social networks. Facebook, unwittingly or on purpose, has been teaching people to manage their own data about themselves. Facebook's launch of the Beacon service -- which informs Facebook of members' activities (i.e., purchases) on other sites -- was a PR fiasco. But it still familiarized millions of users with the notion that they can control information about themselves online -- and determine to whom it is visible."
Ms. Dyson provides a clear illustration of why the very prize for which Microsoft is begging to pay a hefty premium is, even now, gradually losing value.
Leave it to Gates and Ballmer to ignore Schumpeterian dynamics and buy the last online trend, while another slowly builds elsewhere.
Ms. Dyson then gets to the heart of the matter- the economic value proposition these social networks offer. That's important because, as Dennis Berman wrote in the Journal a few months ago, about which I posted here, these online sites have traditionally had difficulty making money for anyone but the founder, after he sold out to a deeper-pocketed media or technology firm. In that post, I wrote,
"Aside from the marvelous business strategy expose, Mr. Berman makes it hard for the reader to avoid asking the question,
"If no other, larger firm, had bought, or bought stakes in, GeoCities, or was trying to buy or invest in Facebook, would Bohnett and Zuckerberger realize millions in wealth simply from the profitability of their businesses and business model? Or would they become, like Amazon, long on initial market value gains, but short on realized profits?"
Thus, leading to the ultimate question,"Were/are the acquiring giants of these online social networking businesses the greater fools?""
With this as background, Ms. Dyson, with her wealth of technology sector background as an observer over many decades, writes,
"So what's the business model? I'll "friend" British Airways, which will say, "We see you're going to Moscow next month. Why not fly through London and we'll give you 10,000 extra miles?" I'm no longer in a bucket of frequent travelers, my privacy protected. I'm an individual with specific travel plans, which I intentionally make visible to preferred vendors. British Airways, of course, will pay Dopplr a handsome sponsorship fee to be eligible to be my "friend" (just as a Nike rep might pay to sponsor a basketball game and be part of the community). Someday NetJets may show up, offering to ferry me and my friends to a conference we'll be attending together.
I'm far more likely to respond to BA or NetJets within a trusted site, and for a specific offer, than I am to heed their ad while reading a newspaper article on the troubles in Russia. (As for Orbitz, my old standby: After five years, it still doesn't acknowledge my preferred airlines.)
The new model creates a more trusted environment for reaching high-value, frequent purchasers, whether of airline tickets, electronics, clothes or other items. Where does that leave the less-frequent purchasers? Probably looking to their friends rather than to advertising for advice. I'm an expert on travel; my friends may look to me for hotel choices. When I'm in the mood to buy a book or a new computer, I'll check out what my friends on Facebook are doing.
This does not mean that traditional online advertising will go away, just that it will become less effective. Value is being created in users' own walled gardens, which they will cultivate for themselves in real estate owned by the social networks. The new value creators are companies -- like Facebook and Dopplr -- that know how to build and support online communities."
Thus, Ms. Dyson not only identifies the upcoming competitive forces which will eventually diminish the value of current online advertising models dominated by Google and Yaoo, but explains how and why the new approaches will displace the older ones.
Ironic, isn't it? It's not enough that Microsoft is now several generations old in terms of its basic, profitable technology- single-computer or network operating systems and applications software. Its leaders have now decided to risk a sizable amount of their retained earnings to buy into a fading online technology/firm.
Evidently not content to dividend their earnings to shareholders, Gates and Ballmer, already wealthy in their own rights, are determined to squander Microsoft's legacy cash horde on a business to which they really own bring money. Just as that business model's probably successor is appearing on the scene.
Truly, you can't make this sort of thing up.
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