YouTube will lose $470 million in 2009 – even more than the New York Times

If you think Google is infallible–and frankly, very often they seem to be–take a moment to consider the hemorrhaging going on at one of its most high-profile investments, YouTube. Farhad Manjoo writes in Slate that analysts at Credit Suisse estimate that YouTube will lose $470 million this year. This would be considered a horrific number even in the newspaper business. (Still chump change if you’re running a car company or a bank, of course.) What’s more, monetizing some of the most popular content on YouTube is problematic, because a significant amount of it is pirated. And the creators of the content–often TV networks–are unlikely to agree that YouTube deserves advertising revenue generated by their content. Can’t say that I blame them. 

The only good news for Google is that they’re sitting on a pile of hundred-dollar bills roughly the size of the Great Pyramid at Giza, which means they will have more time to work on a solution that most other companies would. That being said, Google is caught in a trap of their own devising, and a lot of very smart people don’t see a good way out of it. If they can’t stop the bleeding, Larry and Sergey may even have to downgrade to a 767 and/or cut back on the Alaskan king crab legs in the employee cafeteria. And a pity that would be.

Terrible news for the PC industry: Mobile phones and data plans have found their mojo.

Vic Gundotra, VP of Engineering for Google’s mobile and developer products, makes a simple but compelling case for the direction that mobile phones and data plans pretty much have to go in the immediate future.  And if anything, the current economic climate will accelerate the stampede towards mobile devices. In Gundotra’s own words: “Worldwide phone penetration continues to climb at a break-neck pace, with over 4 billion mobile subscribers at last count. (In comparison, the PC industry is forecasted to see its sharpest unit decline in history.”

As data plans get simpler, web browsers get better and devices get smarter, mobile data use will continue to skyrocket. This is great news, especially here in the United States, the carrier networks have a history of pursuing breathtakingly stupid policies that seem to be designed to thwart the use of their own products (e.g. pay-as-you-go data plans). Finally, they’re wising up. How long will it be before we see a phone serving as the main computing device of the employees of a major company? I put it at 2 and a half years. 

Click here to see the full post on techcrunchit.com. 

Twitter, real-time search and the integrity of information.

Some believe Twitter could find its business niche in the area of real-time search, something Google and its army of algorithms still don’t do particularly well. The only barrier between something happening on one side of the world and your knowing about it on the other is the time it takes to type 140 characters. See the full story from Technology Review here.

While I see the appeal of real-time search, the real need in the marketplace is for authoritative search. In other words, right now no one is really in the business of providing search results based on the integrity of the information returned. The interactive space is the greatest propagator of hoaxes, urban legends, rumor, innuendo, slipshod reporting and outright lies in the history of civilization. This has harmed countless people, causes and brands. Mark Twain said, ”a lie can travel halfway around the world while the truth is still putting on its shoes.” Now technology has made lies faster still.

Is a move towards real-time search a good thing, or have we simply made it easier for the truth to be trampled by a stampede of tweets?

Between Reflex and Reason: Advertising and the Regions of the Brain.

When nearly 100% of people don’t have the slightest idea what a phrase means, it is usually a good indication that we should stop using it.

So it is with “above-the-line” and “below-the-line.” Ask someone in marketing to define them, and he will stammer and flail. Then in all likelihood he will begin to list different media that fall under each heading. Lists are not really definitions, of course, but we’d gladly accept them as rough explanations if only there was some consistency among them. There isn’t.

Nevertheless, some may protest that the distinction is actually quite simple: Above-the-line advertising uses mass media, and below-the-line advertising does not. But in the 21st century, what is mass media? Does it include an in-store video network that reaches 100 million people a week? Does it include an online video that 20 million people see, but not one that 10,000 people see? Where do we draw the line?

Going back to the origins of the phrases is no more helpful. “Above-the-line” and “below-the-line” were originally bits of accounting jargon at Proctor and Gamble. Back when agencies were still earning double-digit commissions on media, they used to throw in creative and production for free. These services didn’t have an impact on P&G’s ledger; hence, they were “above the line.” The other services that P&G had to pay for were “below the line.” Of course, the days of fat media commissions and the logic that spawned the phrases are long gone.

Consequently, it’s time for a radical new taxonomy of advertising. The line we draw shouldn’t be in some mysterious location in the ether but rather straight through the mesencephalon (or, if you prefer, midbrain) of the consumer. In short, it is time to begin categorizing advertising based on the part of the brain to which it appeals.

Essentially, there are two kinds of advertising: The one that asks consumers to make a considered decision by persuading with reason and emotion. Such functions lie almost exclusively in the forebrain. The other kind of advertising attempts to turn the choice to use a brand into something akin to a reflex—or to use a neurological term, an autonomic behavior. Autonomic behaviors, which include things like breathing and the movement of the peristaltic muscles, are controlled by the back of the brain.

Of course, because of a general belief that forebrain functions represent a more advanced state of evolution than primitive hindbrain functions, there will be an immediate rush to elevate advertising that appeals to reason above advertising that strives to create a reflex. After all, Cannes Lions are won by exciting the synapses in the frontal lobe, not by appealing to the more basic functions controlled by the brain stem. I’m going to suggest, however, that marketing perfection lies much nearer to the back of the brain than the front. If anything, the ultimate aspiration of advertising—albeit one that very few brands will achieve—should be to move the communication from the front of the consumer’s brain to the back.

As exhibit one, I give you Google. The genius of Sergei Brin and Larry Paige, Google’s founders, is that they have figured out a way to get paid every time people don’t think. It is a lucrative market. George Bernard Shaw did the math on it decades ago: “Few people think more than two or three times a year. I’ve made an international reputation for myself by thinking once or twice a week.”

In other words, if you can figure out a way to make a few pennies every time people don’t think, there’s a lot more money in it than making a few pennies every time they do. I do not say this to belittle Google’s success, but to explain it. Indeed, coming up with an idea as clever as theirs required a tremendous amount of thinking. Maybe even three or four times a week.

At the most basic level what Google has done is to create and then monetize an autonomic behavior, like breathing. No one makes a decision about whether or not to take his next breath. One does it involuntarily, just as one’s heart continues to beat and one’s peristaltic muscles continue to move food through the digestive tract. In a similar manner, when people want to find something online, they Google it (having your own verb is often a good indication that you have created an autonomic behavior). Countless times I have watched people navigate to websites using Google when it would have been easier to find what they wanted by simply adding .com to the end of the subject itself. They can’t stop themselves any more than they could stop their own hearts from beating. Nor can they stop clicking on the paid search advertisements that pop up at the top of the screen against a pale yellow background.

We do not think of them as little advertisements that someone has placed. We reflexively “know” that because they are at the top of the page, they are good. Yes, our belief in their quality has often been built at least in part by a branding campaign aimed at the forebrain. In fact, search marketing does deliver better results when it works in concert with brand advertising. Nevertheless, it remains true that the act of clicking on a paid link is not generally the result of a carefully considered decision but rather of a kind of reflex action. Something very similar happens in the aisle of the grocery store. Though “executive judgment” may be involved in the choice of a few products, more often consumers are sleepwalking down the aisles and collecting by rote the items they will purchase. Basically, they allow muscle memory to take over, and they begin pulling brands—conveniently identifiable by the colors and typefaces and designs that have been pounded repeatedly into their brains—into their carts. The consumer’s moment of truth is, the majority of the time, not about a conscious decision but a subconscious reflex.

Set aside for the moment the argument about whether advertising that appeals to reason or advertising that creates a reflex should be preeminent. Let’s look instead at more objective measurement—the value the market places on the different parts of the consumer’s brain. We can actually do this rather easily. The numbers are printed in the newspaper every day. Compare the market capitalization of Google with that of some of the major advertising agency holding companies*:

Google $112.54 billion

Omnicom $8.79 billion

IPG $1.75 billion

The disparity is astounding. Investors believe that a single company, Google, which is built almost entirely on creating reflexive behaviors in consumers, is worth many times more than all the major advertising agencies in the world combined. To ignore the meaning of these numbers is to ignore a radical shift in not only what brands expect advertising to achieve but in how they expect them to achieve it.

Put simply, although it’s sexier to get people to choose a brand the way they choose vegetarianism or a new hairstyle, it’s more lucrative to get them to choose a brand the way they choose oxygen.

* As of 2/13/09.

Money, Principles and China

(I wrote this in April 2006 after it came to light that Google and Yahoo were assisting the Chinese government in identifying dissident bloggers who were subsequently arrested and imprisoned.)

“More and more I have come to the conclusion that a principle isn’t a principle until it costs you money.” So said Bill Bernbach.

If we accept that conclusion, it’s difficult to argue that freedom of speech is one of the guiding principles of Google and Yahoo. In February, those companies, along with Cisco, were called in front of Congress to answer for their role in helping the Chinese government spy on or censor dissidents. In fact, information provided by Yahoo has led directly to the imprisonment of at least three dissidents, and contributed to the imprisonment of two more.

Imagine the outcry if a major American advertising agency were guilty of collaborating with a foreign government to persecute its citizens for speech crimes. Angry demonstrators would surround the agency’s building, shaking their fists, demanding boycotts of the agency’s clients and heckling everyone who dared to enter the building— and I would hope that many of the demonstrators would be employees of other advertising agencies.

My hope, however, seems to have been disappointed. Apart from a few little-discussed articles in the trade press, the advertising industry’s outrage against Yahoo and Google has barely registered. Google and Yahoo are not simply media companies from which advertising agencies purchase banners ad placements. They are in fact our competitors, who are busy inventing new types of advertising and media that they are selling directly to clients whenever possible. In many ways, they are the advertising agencies we are all furiously trying to invent in response to new technologies.

Google and Yahoo would have us believe that the simple act of pursuing capitalism in China in and of itself helps to liberalize society. Frankly, this is not a terribly persuasive argument, considering that they’re pursuing a form of capitalism that actively supports repression. I do not accept the premise that the best way to liberate a village is to destroy it.

Many others—the mainstream press included—claim confidently that the 21st century is destined to be the Chinese century, and we can’t afford to be left out of the development of what is sure to become the world’s dominant economy.

Nonsense. Though China has more than a billion consumers, all of whom need to buy things, the Chinese government will ultimately ensure the failure of their economy. Repression is incompatible with economic dominance. So too is blatant disrespect for intellectual property, patents and copyrights. Every year the Chinese government winks at the theft of billions of dollars from western companies—many of whom are our clients.

Mark Steyn crystallized the issue brilliantly in the London Daily Telegraph:

China hasn’t invented or discovered anything of significance in half a millennium, but the careless assumption that intellectual property is something to be stolen rather than protected shows why. If you’re a resource-poor nation (as China is), long-term prosperity comes from liberating the creative energies of your people–and Beijing still has no interest in that.

Forget China. If you want to place a bet, bet on a democratic India to emerge as the next dominant Asian economy.

Bernbach said, “[Creativity] is the most practical thing a businessman can employ.” The Chinese still haven’t caught on to that idea. We should expect better from Google and Yahoo, however.

Google’s chief executive Eric Schmidt recently said, “I think it’s arrogant for us to walk into a country where we are just beginning operations and tell that country how to run itself.”

I think it’s arrogant for Eric Schmidt to expect us to believe that Google and Yahoo haven’t shamelessly put money above one of the most important principles of western liberal civilization. The internet is supposed to be about a democracy of ideas. It’s supposed to be about putting into the hands of individuals technology that allows them to express their opinions and beliefs to millions. Google and Yahoo cynically have stripped away the promise of the medium for the opportunity to pocket a few extra coins. For that, there must be a price to pay.

© Scott Johnson, 2006