Edge Ideas

The day that text-based paid links were combined with algorithmic search results was one of the most important days in the history of the Internet. But what was even more important is what came in the days following that brilliant synthesis: nothing.

In those early days, the wise men and women of the Internet ad world waited expectantly for what would surely be phase two: graphical ads next to search results. Maybe they’d be mini-banners. And then maybe they’d be animated.

We waited and waited. And it never happened. Search ads remained text ads.

It turns out that text-based paid links work just fine without images and animation. In fact, they work better than any ads anyone has ever seen on the Internet.

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Text-based paid links work so well not despite their lack of banner stylings — but because of them. By focusing on a snippet of plain text and a single link, search engines stumbled onto two principles that are essential for successful advertising today.

The first principle is that the advertising must match the purpose and substance of the content. It must directly satisfy the reason you are consuming the content and be as close as possible to the nature of that content. Movie trailers do this. And glossy fashion magazine ads do this. And of course paid search links do this perfectly.

The second principle, which is especially relevant to digital spaces like the Internet, is that the cost to make the ads must be low enough that advertisers can freely experiment with creative. This enables poorly performing ads to be killed and replaced without regret, inspiring a kind of Darwinian creativity of search engine marketing (or “SEM”) creative that pushes the most valuable ads to the top of the heap.

Once the success of paid search became obvious, Google developed a version of the service called AdSense, which matches text-based paid links to content instead of search results. For many sites, particularly those in commercial categories, this AdSense unit became a valuable part of their monetization approach. If you were on a page explaining how to select a cell phone, the AdSense links to genuinely great deals on handsets or services were a consistent and valuable part of your experience.

But for news-focused sites, text-based paid links never achieved the same financial significance. If you are reading an article about how cell phones may give you brain cancer (they don’t, by the way), the paid links to cell phone advertisers are at best irrelevant and at worst annoying. Given the choice, news sites always prefer to sell bigger and better banners.

The reason is that, when you’re reading news, you aren’t looking for links to deals or companies. You’re looking for recent and interesting updates or opinions from highly relevant sources. (You’re also not looking for bigger and better banners, but advertisers have convinced themselves that at least you can’t help notice them.) The elegant platform for monetizing news reading would charge marketers to provide recent and interesting updates and opinions on the news. And, of course, creating these updates would be inexpensive enough that marketers could quickly learn and be rewarded for better product.

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About two months ago, at their Chirp conference, Twitter COO Dick Costolo announced his company’s new “monetization platform.” He didn’t explain it this way, but Promoted Tweets are the first plausible attempt to build an advertising system for news on the Internet.

First, Promoted Tweets is tweets, just like paid search is links. They will be created as tweets, have the same functionality as tweets, be presented in a stream with tweets (though clearly disclosed as paid), and exist for the same purpose as tweets: to notify of news or opinion.

Second, creating tweets and seeing whether they take off — through a engagement metric called “resonance,” which Twitter will provide — costs very little. People with backgrounds in public relations and communications (i.e., people who understand what makes news interesting) will quickly learn what kind of updates work best on what kinds of stories. Just like SEM, these marketers will battle it out to win the top spot, with the benefit going to the user, who will be shown the demonstrably best content.

From a personal perspective, I am certain these tweet-ads will be highly successful. My beloved UberTwitter already incorporates a foreshadowing of the new Promoted Tweets system through partnership with ad networks 140 Proof and One Riot. Despite the fact that their limited inventory prevents meaningful targeting to my interests or to the rest of the tweets in the stream, the facts that these ads are newsy and right in the stream compel me to read them. In just a few months, I’ve clicked on far more of them than I have clicked on banners in the past ten years.

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This is an opportunity for news-centric sites, but there are two challenges.

First, this business model will not succeed if long-form articles are the primary unit of news consumption. For an ad to match the purpose and substance of a site based on articles, the ad would need to be an article. A good article, ideally. This is being tried, by the way, on more adventurous news sites now, like Alleyinsider’s Sponsored Posts. But articles are expensive to create, slow to test, and embarrassing to revise. As with text-based paid links in search, the ad chunk needs to be smaller, cheaper, and amenable to iteration.

Can news organizations adopt a smaller unit of content? A new news atom much smaller than the article? I think there are strong reasons to do so, especially with evidence of soaring mobile (i.e., small screen) news consumption. And the micro-chunk and the article aren’t mutually exclusive. One can build to and reinforce the other. But this is a question of the core user experience, and traditional news organizations are not likely to demote the article to a secondary status.

Second, the ad needs to resemble the content and be consumed in the flow of the user experience. It must be clearly disclosed as paid, and it can be adjacent to rather than mixed in with the editorial content. But, again, as with text-based paid links in search, the eye must pass over the ad in the natural course of its journey through the user interface.

Can news organizations give a useful purpose to their advertisers, as Twitter’s Promoted Tweets will propose? The data will show that users prefer tested and successful ads that are relevant and demonstrably readable to ads that are unrelated and ignorable.

Another important day in the business history of the Internet is almost here. Twitter is about to roll out the first serious attempt at an ad system specifically designed for news consumption. Ironically, perhaps, it won’t work well for most existing news content or news organizations. Can they adapt? Maybe. But if they don’t, new news organizations will emerge to seize the revenue opportunity.

The recent brouhaha around Facebook’s privacy policies — the complications, the simplifications, the push, and the push-back — is a side-story. The real issue is positioning. And the real cost will be felt if and when a meaningful percentage of Facebook’s users come to see it as a place to share and consume media rather than as a place to communicate with family and friends.

The revenue models associated with consumption of content are very attractive, especially when combined with an already massive audience like Facebook’s. But any re-positioning of the service as a “news and entertainment portal” — even partially — will muddy Facebook’s most important asset: its inherently viral nature.

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All Internet products can be placed on a spectrum that stretches from pure Communications on one side to pure Content on the other.

A pure Communication product is one that a person uses just to communicate with another known person (like the simplest instant messaging client). A pure Content product is one where a person creates some media that any user can passively consume on an anonymous basis (like the simplest news website or printed publication). These are idealized extremes; just about everything is actually somewhere in between.

The core of a Communications product is connecting with the people you know — and doing so actively rather than passively. That’s what gives Communication products their viral power, but it’s also the cause of their revenue limitations.

As long as the service offers a valuable way to communicate, its users will actively convince some number of their friends and colleagues to use it, and those people will in turn convince folks they know, and so on. Successful Communication products are inherently viral. But, in this idealized context, users value private communication. Messages from other sources are inherently invasive. Thanks, but no thanks, marketers.

This is why investors avoid funding pure Communication products. As attracted as they are to the viral growth, they fear that they will never be able to convince the service’s users to tolerate a marketer’s butting into their private conversations. As tempted as investors are to analyze those private conversations for insights on how to offer users genuinely helpful offers, they worry that users will find it frightening. And as convinced as they are that some small percentage of users will pay more for premium services, like storage, they know that a competing service will always try to grow faster by giving away that premium service for free.

In short, the Communications side of the spectrum represents viral growth without matching revenue.

All the way across the spectrum on the Content, we face the opposite issues.

The core of a Content service is consuming media from a trusted source — and doing so passively rather than actively. That’s what gives Content products their marketing power, but it’s also the cause of their growth limitations.

Unlike a Communications service, a user can have a successful Content experience without ever involving anyone else. The user might choose to share some of the media with their friends or colleagues or to discuss it with them later, but that’s only a small percentage of the time.

And this is why investors avoid funding pure Content concepts. Despite the well-known problems of banner ads, they are well aware that marketers will pay handsomely for the right to appear next to popular media and even more to be endorsed by it. They know that the content itself can be efficiently analyzed without any privacy problems to ensure that the ads will helpfully match the content. But investors also realize that the number of trusted sources from which most users want to passively consume content is limited, which makes it very expensive to compete as one of those sources. And there’s no inherent virality: you have to grow the audience one user at a time.

Of course, most Internet businesses are actually somewhere between these two extremes. In fact, developers can add features to their services to deliberately shift their products more toward user growth or more toward the revenue-generating characteristics of the business.

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So how would a brilliant entrepreneur take advantage of these dynamics to create a massive and lucrative web property?

Step 1: Discover a unique and valuable way for people to communicate with the people they already know.

Step 2: Invest in the product so that it can handle the viral tidal wave that results.

Step 3: Add features that encourage users to share and consume content.

Step 4: Sell advertising around the socialized content both on and off your site.

Sounds familiar, right? Yes, that’s what Facebook is doing now.

Mark Zuckerberg is aggressively pushing his service from pure Communications to the middle of the spectrum toward Content, repositioning the platform to be more conducive to marketers. He’s been doing this for a while.

So, based on the spectrum thesis, will Facebook’s strategy work?

Yes and no.

Yes, he will create a user experience that is more about consuming, creating, and sharing content. Yes, this will open up richer opportunities for non-invasive and targeted advertising and e-commerce. Yes, this will generate more money per user than a more Communications-oriented platform. Yes, it should be one of the biggest IPOs of all time.

But, no, there’s a limit to how far he can push the service toward Content before users seek out a Communications platform that is focused on enabling private interactions with friends. The closer Facebook gets to a media experience, the more its viral growth will slow and the more it will shed longtime users. When you hear someone talking about how they go on Facebook to read the news or watch a TV show — and you certainly will — that’s more bad than good for Facebook’s user growth rate.

This is the trade-off. The challenge isn’t privacy; it’s positioning.