Customer relationships in a beta world

Random thought in process, would love outside perspective…

I may be late to the game here, but I’ve noticed recently an increase in applications processes for participation in beta programs. For example, to join AdSense for feeds, you have to apply. To join the Tivo ipod/PSP download beta, you have to apply. To become a beta tester for SlingBox, you had to apply (before they launched).

I understand the need to find qualified people to be your beta testers. And there is nothing new about the practice of beta testing: Consumer product companies regular launch products in test markets. Films often open in “limited release”. But the difference is that the restrictions in those cases are not personal – you are not turning down someone who is paying you $12.95 a month, for example.

It seems that with these programs, companies are taking their customer base for granted. It sounds like a great idea to build buzz by having a limited, hard to get into program – the “I wouldn’t want to be a member of a club that wanted me as a member” school of marketing. But, when you say no to a current or future customer, you inevitably, I think, hurt that customer relationship and risk an “if you don’t want me, I don’t want you” backlash. Maybe not a big one to start. But when customers are your biggest asset, it is worth asking if you want any damage at all.

Significant Business Risk

More facts and fun about the privacy issue facing Google et al – from MediaPost’s Just an Online Minute:

For Google, fallout from the government attempt to subpoena the company’s records isn’t likely to end any time soon.

For now, the government is seeking only a list of 1 million Web sites and records of searches done in a one-week period. And, despite some muddled news reports, the feds aren’t seeking this information as part of an effort against “child pornography.” Instead, the government wants to prove that minors have easy access to online porn–though why the feds think they need Google’s help with this remains mystifying.

Even though the government isn’t seeking any personally identifiable information, the public at large has grown concerned–apparently because people are just now realizing that companies like Google store searches.

A recent survey by the Ponemon Institute found that 89 percent of Google users believe their Web searches are private. What’s more, 62 percent said that if Google released information about their Web searches to the government, they would stop using Google. For the report, Ponemon surveyed more than 1,000 Web users this weekend.

Those numbers alone show that Google–not to mention the rest of the search industry–will soon face a monumental crisis unless the public is reassured that the feds aren’t going to get their hands on information that will link people with their Web searches.

Don’t want to beat a dead horse here, but I think this will emerge as a Significant Business Risk to Google. Not because consumers will stop using it – people say all sorts of things in surveys the never actually do in practice, and there are numerous ways to word questions to get great headlines the next day.

But, as I have written before, the threat, compounded the longer the bad press continues, is that the brand advertisers, i.e., the growth engine, will start avoiding the medium.

Stop Badware

From today’s SJ Mercury News:

A coalition of academics, consumer advocates and technology firms is taking aim at malicious software, launching a site today that it hopes will help protect consumers and place software makers under the harsh glare of scrutiny.

The Stop Badware Coalition said it intends to shine a spotlight on companies that trick Internet users into downloading programs that steal personal information, launch unwanted ads and spread computer viruses.

The effort is being run by Harvard University’s Berkman Center and the Oxford Internet Institute, with help from Consumer Reports. Technology companies Google, Lenovo and Sun Microsystems are providing undisclosed funding for the multi-year, multimillion-dollar project.

“I wish we were getting a handle on this problem, but I think it’s pretty substantial,” said Vint Cerf, Google’s Internet evangelist, about the malicious software problem. “There’s an uneasy feeling that going online is risky.”

Check them out at www.stopbadware.org.

Online privacy

The recent subpoenas of search engine records has restarted the discussion over internet privacy.

One of the least surprising aspects of this discussion is the lack of public knowledge about their lack of privacy on many internet services. For example, a recent survey found that 77% of Google users don’t know that Google stores personal information about them. From the article:

Google maintains a lifetime cookie that expires in 2038, and records the user’s IP address. But more recently it has begun to integrate services which record the user’s personal search history, email, shopping habits, and social contacts. After first promising not to tie its email service to its search service, Google went ahead and opted its users in anyway. It’s all part of CEO Eric Schmidt’s promise to create a “Google that knows more about you”.

That’s a big problem. It is clear why Google is resisting the subpoenas. I am sure Google is in part motivated by some altruistic desire to protect people’s privacy. However, a large part of this, I would bet, is driven by the realization that if consumers don’t even know data is being collected, seeing you willingly turn it over to people has the potential to cause a huge backlash. In other words, it is damage control or prevention, depending on how you think about it.

The real danger in all of this, I think, is the impact on behavioral targeting. I have believed for a while that behavioral targeting is doomed in the long run, because of the tactics that have been historically employed to gather the information. If a well known company like Google can collect personal data without the majority of their users realizing it, imagine how many of the “adware” companies truly have consumer buy-in. My guess – not very many.

Until we have a real opt-in system, one in which consumer privacy comes first, in which there is full disclosure it will be a dangerous area for large brand advertisers.

This a dangerous area for brand advertisers, the ones who will fuel online advertising growth. Nobody wants to be associated with large consumer backlashes. They are bad for the brand, and bad for the business. And behavioral targeting, in my opinion, presents too great a PR risk at the present time.

The solution is a real opt-in system, in which there is full disclosure of what is being collected, full ability to edit or restrict the collected information, and complete trust that the terms and conditions will not change at a later date. John Battelle today called for something similar, namely:

- Access to a record of all the information they keep on us and how they use it
- The ability to challenge that data’s accuracy, and edit it for accuracy
- The ability to opt out (with a clear understanding of the resulting loss of services and opportunities that might result)
- The ability to set permissions as to who else might see the data
- The right to maintain a user copy of that data for archival purposes
- The right to share in the value of that data on negotiated terms

Amen.

Only when that type of solution is available will brand advertisers truly be safe playing in the “behavioral” realm. The first companies that get there will find a receptive audience ready to spend.

Regulating Marketing Delivery

Eric Goldman has a great overview of the state of “Regulating Marketing Delivery” on his Technology & Marketing Law Blog.

Definitely worth reading.

iTunes Spyware

Apple is getting into a little trouble with their new iTunes release:

From Kirkville: “Yesterday’s update to iTunes 6.0.2 comes with a surprise: it’s spyware and adware. … Apple has overstepped its limits, and this spyware (because it sends information to a server) and adware (because it displays information to attempt to sell you products) is a very serious breach of the trust I have long had in Apple’s products.”

Perhaps more troubling than the actual activity is the way that Apple has done it. From Boing-Boing: “As Marc at Since1968 points out, there’s no language in Apple’s privacy policy that addresses this specific behavior.”

That, for me, is the heart of the matter. In order to make good on the promise of ever better personalization, and to help consumers improve their Return on Attention, you need to collect information about them. If Apple were upfront about this, and provided a clear and easy way for people to either opt-in or opt-out (opt-in is better), this would never have become an issue. Interested consumers would have embraced the new feature, the same way they have embraced Attention Recorder.

Problems only arise when you violate consumers’ trust and take their privacy lightly.

The importance of Return on Attention

There has been a lot of discussion recently about the impact of Search Engines, and specifically Search Marketing, on the Web. Some people have asserted that Search Engines are “leeches”, feeding off of other people’s hard work. Others have defended Search Engines as wholly beneficial to the vast collection of web publishers, providing an income and distribution source that they otherwise would not have.

This discussion got me thinking about the real incentives provided by Pay-Per-Click Search Marketing. Nick Carr touches on this in a recent post:

“The economic incentive for the content producer therefore is not to produce content that simply engages a large or demographically attractive audience, but to produce content that (a) attracts an audience likely to click on a valuable advertising link and (b) increases the odds that such lucrative clicks will actually happen.”

This is an important point – these incentives are real, and can lead to two outcomes for content providers:

1 – Content providers change the type of content they provide to get a more valuable audience (for example, emphasizing product reviews instead of how-to articles)

2 – Content providers change the content of what they publish to more explicitly steer consumers to click on advertising. For example, writing good product reviews for marginal products, or writing articles with integrated “product placement”.

In either event, the safeguards that traditional publishers have had in place for years to minimize the impact of advertising on editorial content will not exist.
This is where Return on Attention comes in. If we can measure Return on Attention, we start to give consumers more control. How?

First, feedback. By letting other people know how valuable you found a site, you are strengthening the quality of the content (not in a News Hour with Jim Lehrer way, but perhaps in an audience-friendly Fox News way).

Second, quality. With click fraud and rising keyword prices, advertisers will start to demand and seek out high quality lead flow, not just a high quantity of leads. In other words, they will start to reward sites that send them eventual customers, not sites that send them leads.

In a world focused on clicks, all that matters is getting the click. Advertisers and search engines have become very skilled at increasing clickthrough rates on their ads. However, that results in low quality leads. The coming focus on high quality (but perhaps lower volume) leads is a disruptive change for the market. Return on Attention is the critical guide to success for publishers. Focusing on Return on Attention – and therefore focusing on quality content – will yield the greatest return on online publishing assets in this new environment.

Is PPA the answer?

It would be a stretch to claim that Google is in big trouble.

However, there has been considerable negative chatter recently about the implications and risks of the Pay Per Click (PPC) business model employed by Google and the majority of other online marketers (search engines, comparison shopping sites, etc). See, for example, Blodget, Nielsen, and Carr.

The objections include a) Click fraud is damaging advertiser returns while benefiting Google b) the PPC model yield a high volume of low quality leads c) search engines benefit from improvements in conversion rate on advertiser websites, even though they do not contribute to these improvements. Fundamentally, when you boil it down, the issue is mismatched incentives. Google does not have the same goal as its advertisers.

If (when?) this becomes a real, widespread issue for advertisers, Google will have a problem. It will have to start seriously considering employing other advertising models. They’ve started playing with CPM (cost per impression) based models. CPM is pretty old school, Web 1.0, relying on eyeballs. However, reverting to 1999 (even an auction-enabled version of 1999) is not a solution. CPM reduces the direct pay for performance aspects that people love about PPC, and it does little to eliminate gaming – it just changes the game.

PPA – pay per acquisition – models may be a much better alternative for the advertiser. In this model, the advertiser pays a commission when someone buys something. This has existed for a long time as affiliate programs. Amazon, for example, uses this approach when it allows people to put book ads on their sites. Amazon – the advertiser – only pays when someone buys the book.

PPA-based business models do not have the same problems as PPC. Sites are no longer compensated for low quality leads. Click fraud is a much smaller issue – few companies will be willing to pay people in India and China to actually buy stuff.

Indeed, PPA aligns the interests of the search engine and advertiser to an extent impossible via other models. And it is not that far out. Mainstream ad agencies have started talking about using this type of model for traditional advertising. It is, if anything, easier to do this online.

Anyone who figures out how to really apply PPA models on a broad scale will have an eager advertiser customer base. It’ll be interesting to see which of the search giants take the initiative on this.

“We were eager to help them shut us down”

“We were eager to help them shut us down,” jokes Sun-Times Publisher John Cruickshank. “They’re buying ads. We like that.”

Today’s Chicago Business reports on an expansion of the tests Google was running a few months back, this time focusing on newspapers instead of magazines.

“In a quiet and small-scale experiment, Google is running classified-like ads in the pages of the Sun-Times, which so far is the only newspaper participating in the Web-search behemoth’s test.

… Now, in the Sun-Times, Google is running ads in proximity to relevant content. On Dec. 12, for instance, Google ads touting ticket brokers, White Sox apparel and Chicago Bears memorabilia ran in the Sports section.”

A peek at VC returns

It is always tricky to really understand the world of VC and other Private Equity funds. Specifically, the funds typically go to extreme lengths to not disclose the returns on their portfolios. However, the Ohio Workers Comp fund has just published details of their returns. All in all, they made a total of 4.5% since 1998.

I think they need a new investment strategy.

The article also shows the vast difference between funds:

“Some funds, nonetheless, have already generated high returns. The bureau’s $8.2 million investment in a fund run by Quad-C Partners of Virginia in 2001 produced a $1.9 million profit check and a March 31 balance of $13.7 million – a return of 89 percent. Its 2000 investment of $14.3 million in the Carlyle Partners III fund of Washington, D.C., was up 49 percent as of March 31.

None of the five Cincinnati funds managing bureau money showed a positive return as of March 31.

Its $13.6 million stake in the Blue Chip Ventures IV fund in 2000 was down 16.8 percent. Its $11.1 million stake in the Fort Washington Private Investors Equity III fund was down 4.2 percent.

Meanwhile, the bureau’s $2.4 million investment in River Cities III declined 9.2 percent. Its $900,000 stake in Triathlon Medical was down 47.1 percent. Its $350,000 investment in Charter Life Sciences declined 42.9 percent.”