broadstuff

Readers of this blog will know we are interested in privacy ensuring systems - we call them "obfusticators" - that help to disguise the electronic footprint and leave one less open to datascrapers like (insert your favourite Search Engine here for starters....). News this am of an interesting hardware based system from JanusVM (who also do software obfusticators).

It works with one or more IP compatible devices. This device is a small router.
Place it between your PC and your existing router, cable modem, or DSL modem and all your traffic is routed over Tor or OpenVPN.
If you place it between a switch and the existing router, all the traffic that leaves the switch is re-routed through Tor or OpenVPN.

Let the privacy arms race begin...... I wonder if equipment like this will be standard in domestic routers by next year?

(Heads up hat tip hackaday.com and hdmoore)

Interesting article on Techmeme from Brad Ward of Butler College in the US, about how a ring of people are setting up phoney "Class of 2013" Facebook groups for new 2009 students. He found c 500 colleges with these groups, all run by a small group of people. At first he was nonplussed - what is the point of cybersquatting like this, when the incoming students will do what they will anyway - then he realised what the game is:

Sure, not for one school. Not for tiny little Butler, with 900 incoming students.

But for 500+ schools? Owning the admin rights to groups equaling easily 1,000,000+ freshman college students?

That’s huge.

Think of it: Sitting back for 8-10 months, (even a few years), maybe friending everyone and posing as an incoming student. Think of the data collection. The opportunities down the road to push affiliate links. The opportunity to appear to be an ‘Admin’ of Your School Class of 2013. The chance to message alumni down the road. The list of possibilities goes on and on and on.

The company doing it apparently goes by the unbelievable name of "College Prowler"! (Though they claimed it was an un-named contractor doing a lot of these phoney groups - their comment on the original blog post is, um, "interesting".

From a big picture perspective, having a marketing strategy using social networking sites (like Facebook) is something that is necessary to be effective in our business. We do pride ourselves on being forward thinking and aggressive. In this instance, in its current form, we have crossed the line and to reiterate, we will be removing our administrator privileges from all of these 2013 groups immediately.

I.e. they were caught at it. The thing that immediately occurs is how many more of these rings are there going on, its unlikely to be limited just to college (university) students - and how would one even find out? Unlike say Twitter where you can find the Twerps, its far harder to analyse Facebook to get this data.

But to an extent maybe this is just a fractal effect of Facebook culture - starting with Facebook's dodgy Terms & Conditions, taken on through the sleazy play that was (is) Beacon, can one expect any better?

Update - Larry Dignan argues that this may be an argument for verification, but it is very hard to see how that would work - determined scamsters will fudge it anyway, and it just increases friction for the average teenage college user (do they need credit cards or what for example?)

Interesting article from Jeremy Liew of Lightspeed Ventures in the WSJ on the impact of The Crunch on Web 2.0 companies (mainly consumer focussed ones). He predicts that:

...media buyers will focus on both a flight to quality and a flight to surety. This will benefit three types of startups: companies with large audiences, companies that sell direct-response advertising, and companies that offer valuable niche content.

His argument is that:

- Sites with well known brands and meaningful traffic will remain in the ad plan. Just as no one ever got fired for buying computers from IBM in the 80s, so too no one will get fired for buying advertising from Google and Yahoo! today. However, many smaller companies have built huge audiences that are just starting to be monetized. These are the companies that will see the most growth through the recession.

- In an uncertain environment, advertisers will also want to shift more of their advertising budgets to direct response (the online equivalent of 1-800-number advertisements) and away from brand advertising.

- It will be very hard in the short term to prove that Ad targeting is more effective and justifies a premium price. As a result, vertically focused content sites will have an advantage.

We think the other Web 2.0 companies that survive will be ones that:

(a) Don't need money for 2 years and thus don't have to make the above compromises - those that have serious money are lucky, others are considering reducing burn rate.

(b) Can find some form of non-Ad based monetising model that works - Flickr, for example has moved to a freemium play

Those that are not in these boxes (we can all think of a few, some fairly well known) will probably hit the deadpool (or have their plugs pulled - expect lots of "sales")

Not so long after a piece of research showing that display Ads are more effective than previously thought, comes this one from Barron's noting at display ads may be less so:

In a fascinating series of reports today, new Canaccord Adams Internet analyst Jeff Rath takes a close look at the Internet advertising sector, and concludes that the CPC model is more vulnerable than some people might believe. Rath launched coverage today on 7 Internet stocks today, starting 5 of them with Neutral ratings - Google (GOOG), IAC (IACI), Marchex (MCHX), Local.com (LOCM) and Answers Corp. (ANSW). He has a Sell rating on ValueClick (VCLK), and his sole Buy rating on BankRate (RATE).

For Google, he has a price target of $300, below the current level.

“We believe the tide on performance-based advertising as a counter-cyclical ad format better able to weather a downturn has shifted, and we expect to see CPC pricing and the density/volume of clicks to decline,” he writes. “Our checks support the thesis that while Google continues to have various levers at its disposal to meet estimates, revenue estimates estimates could be at risk with search representing the company’s primary source of revenue.”

He goes on to assert that Google could be reaching “the inflection point of its product cycle,” and that “margin contraction could be significant.” He writes that Google “has tremendous alternative product opportunities in its pipeline that could reinvigorate the product cycle,” but that he does not expect any of those to contribute materially in the near term.

Here are few of Rath’s other observations about the Internet ad environment:

- He sees CPM rates dropping “precipitously” in Q1, with prices potentially falling by 15%-20%, “as checks indicate budget cuts around branding campaigns are the first to be pulled.” (That would be bad for Yahoo, among others.)
- He expects CPC rates to be weaker than expected; he thinks CPC growth could turn negative over the next several quarters due to weaker demand; he says pricing could come down due to “weak bid density on keywords.”
- December quarter and 2009 consensus estimates “are potentially at risk due to recent foreign exchange volatility that has seen the U.S. dollar strengthen materially.”
- He thinks 2009 EPS for the sector could show modest to zero EPS growth.
- Another risk, he says, is reduced interest income, with cash balances yielding next to nothing.
- The ad network space is over-crowded, with more than 300 players. He expects them to see “severe competitive pressures,” and notes that increased integration of DoubleClick by Google and aQuantive by Microsoft could place further pressure on the independent networks and lead to “aggressive consolidation.” (Ergo, the Sell rating on VCLK.)
- He expects TAC, traffic acquisition costs, to trend higher due to competitive pressures from competing search engines.

The only thing Google makes margin from at present is search Ads, so if margins reduce on these then this will put a lot more pressure on their other operations. Early signposts will be closure of more marginal services, and effors to reduce YouTube losses. Funnily enough, thats what they've been up to recently........

From Business week article about Digg:

Last year the company lost $2.8 million on $4.8 million in revenue, according to Digg financial statements reviewed by BusinessWeek. In the first three quarters of 2008, Digg lost $4 million on $6.4 million in revenue. Adelson declined to comment on the figures.

Thats an increase in loss from 58% to 63% of revenues as it grew them by 71% - ie the loss increased by about 1 % point for every 15% growth. Clearly there do not appear to be economies of scale operating here, so the bigger Digg gets, the more it loses.

Assuming Digg grows by the same % again next year to c $11m it will thus lose between $7m (keeps ratio) and $7.5m (increasing rate of loss).

Out hypothesis is that this is because the cost of supporting each transaction is higher than its revenue benefit, and that the cost is growing at a faster rate than the benefit as network complexity sets in (Metcalfe's Law has a dark side - transaction costs also increase with scale, so beware if revenue starts to reach a diminishing return point) without being able to raise revenue in line with this

So the issue for Digg is how to push that diminishing rate of return further up the growth scale. One approach that may work to good on the revenue and cost side is filtering out the cr*p early. Because those transaction costs are non-zero, the Web 2.0 dogma of "publish, then filter" breaks down after major scale is reached. Less cr*p would probably also bring in more high end readers, who avoid Digg due to - well, the cr*p content.

Update - looks like SAI has picked up the same observation this morning.

As part of a forthcoming Online Video Distribution report we've been working on with STL Partners, I modelled the internal economics of some major video distributors on the Web.

We looked at Hulu and most of all, at YouTube. The models use public domain information and make some of our own assumptions as to underlying economics. Before you read this, you should probably read this post of my presentation at the STL Telco 2.0 conference..

The dynamics of the 2 businesses are different in that YouTube serves an enormous volume (reportedly 1 billion plus downloads a day) of small files (around 2.75 minutes on average) at a low ad-inventory fill ratio - only 3-4% of videos carry advertising at all - and low CPMs (around $10, if that). Hulu serves a far smaller volume (about 3-4 million per day) of larger files (around 27.5 minutes), with dramatically higher ad inventory served (we have assumed 80% in the models) with higher CPMs (assume c $15 — 20).

Regarding content creation, we assume YouTube, in effect, pays nothing for its content (recent mainstream deals will change that going forward of course), whereas Hulu has to pay 70 - 72% of its income to the content providers. Aggregation is assumed to be hosting costs, upload and transcode costs, and all staff and SG&A costs. As can be seen, they are fairly small compared to video distribution costs as volumes grow.

The costs of distribution we use are based on Amazon S3 and Akamai pricing; we reckon Hulu’s paying roughly the S3 pricing, and YouTube is paying 50% of that due to its use of Google data centres and extensive peering. Interestingly, the widely-quoted figure of $1 million a day in bandwidth appears to be accurate; our estimates using two different methods converged on a bandwidth bill of $30 million a month.

The main business dynamics revolve around average ad value vs cost per video served — the higher the CPM and Ad inventory % served, the better the revenues (favours Hulu), the bigger the file size and payment to content producers, the worse the costs (favours YouTube). The percentage of outgoing streams that carry any advertising is crucial; whether it’s a macro-advertising play like Hulu (comparatively few but high-value) or a micro-advertising play like Google Ads (low value but extremely high volume) is secondary, as both stand or fall on how much of their content actually carries ads.



We estimate that Hulu is marginally lossmaking today, losing around $9m this year on revenue of $52m, and YouTube will lose about $91m on revenues of $118m. We conclude that, for YouTube to break even, it needs to either drive down its transport costs to 33% of major CDN equivalent or radically increase the percentage of streams that carry advertising. Major change factors which could perturb this include the impact of high-quality (HQ FLV or H.264) video on YouTube’s bandwidth budget, the relationship of both competitors to their parent companies, and their relations with content providers.

Our bandwidth estimates are based on Adobe’s documentation of the Flash video protocol and the actual size and other details of YouTube videos, which give a bitrate of 384Kbps; providing high-quality video could increase this by as much as a factor of five (assuming H.264 High Predictive, 320×240, frame rate 36). Obviously this would pose a significant challenge to YouTube’s profitability.

YouTube is increasingly making deals with content providers to share ad revenue with them in return for the use of their copyrights. This is of course a hit to revenue, but it can be confidently assumed that YouTube will make sure that if anything carries ads, it will be the videos they are paying for. Depending on the distribution of traffic among the videos, it may be that the 3-4% ad ratio is enough to fund the long tail of free material, if the hits all carry advertising; a sort of balanced portfolio approach. (They may also choose to advertise preferentially on high-quality videos.)

Hulu, being owned by content providers, has the feature that its profitability is a function of their tax policy - the owners could choose to set the price of their content high enough to secure the whole of Hulu’s potential profits as sales, or alternatively they could keep it low or even free and take any surplus after distribution costs as a dividend.



However, the fundamental issue is the same even if they choose to obfuscate the business model; funding online video from advertising is all about how many ads per stream you serve up. If YouTube could sign some more peering agreements and keep moving things to cheap sources of power, increasing the ad ratio from 3 to 4% would be enough to reach breakeven. Essentially, it’s a traditional media sales desk - first of all, you’ve got to fill ad space. You can choose whether you want a margin-first strategy, like traditional advertising, or a volume strategy, like Google Ads; but either way you must sell.

Update - there is a piece today on CNet saying that Universal is seeing "tens of millions" of dollars from YouTube advertising. This would seem to corroborate the Hulu Model and also explain why YouTube is moving so rapidly in this direction now.

(You may also like to go back to our post on Joost with these analyses in mind, and understand why we came to the conclusions we did)

Like any good Open Source believer, I use Firefox. I'm a "late" early adopter, I like to use something once its been out in the market for 6 months or so (I've been through my guinea pig phase).

Anyway, this week I downloads Firefox 3 onto my laptop. Its a 3 year old Dell Latitude 400 machine on XP Pro, not top spec but has plenty of oomph still for what I need out and about (hmm - or maybe I do need a new one). The big desktop in the office does the serious heavy lifting (and game playing....)

Result - the system ground to a complete halt. Pages took longer to load than on dial-up days (5 minutes for this Blog Edit Page this am - that was the final straw).

Killed Firefox 3, went back into Internet Explorer and reloaded Firefox 2.0 - normal service is now resumed. Now, before y'all tell me that my computer can be upgraded, that there are help pages galore to help me speed up FF3, that I can tinker and disable and tune - let me just stop yous right there.

I don't care.

I ain't going to upgrade my machine - its a joe average machine compared to whats out there. Any successful package on the market today has to cater for a machine like this one or it will die.

Similarly, when I download something, I want it to work straight away, I don't want it bringing my computer to a grinding halt, and I especially don't want to faff around trying to search help groups for how to make the product work. If there are things I can disable, fine - but make it simple to find and do, not arcane. If its the only package that does the job, fine - I'll put the effort in. But web browsers are a competitive market. If this one's cr*p, hey, there are others

Now, I note that Firefox will withdraw support for version 2.0 in December 2008. I think thats a mistake, I think Firefox 3 is too big (or too bloated / inefficient) to run easily on many machines out there. They risk losing the market to Chrome (because its far more stripped down) and/or never getting the people moving over from IE. And the place you really really don't want to lose is the sweet spot of Windows users on - or interested in - Firefox, thats the big addressable market

Anyways, that my prediction for 2009 - Firefox 3 will lose Mozilla market share unless they can come up with a version or a download pack that loads cleanly and runs quickly on the average Windows machine out there.

Micropayments in Twitter using TwitPay, from Megan McCarthy at CNet:

Here's the premise: Sign up, put some cash in your Twitpay account through another payment service like PayPal, and then send out a "tweet" to another Twitpay member, structured like "@josh twitpay $10 for beers." Twitpay takes a five-cent commission. Its founders are hoping that, eventually, it can be used for charity and disaster relief payments.

It's a nifty idea, though not for everyone. You don't get cash out of it, for example--Twitpay reimburses you in the form of Amazon gift rewards instead. Also, I'm not sure I always want to make it public that I'm letting @josh pay for my beer (don't want my Twitter followers thinking I'm a lush and a mooch), and Twitpay doesn't work with direct messages or friends-only Twitter accounts. You can, however, go to the Twitpay homepage and use that in lieu of a formal tweet.

According to Twitpay's FAQ page, the app was created "because Silicon Alley Insider said it was a billion dollar business (and) a billion dollar business sounded good to us."

Well, micropayments has been an emerging billion dollar industry for quite a while, but its never quite taken off yet.

Its an interesting idea, though Twitter is just the transport mechanism here - you don't need to do this on Twitter, any transaction recording system would work (a Yahoo Group for example, but that doesn't quite get the buzz in 2008).

In fact, they would probably be better off with a system that allows more privacy, as the piece notes. The minute money starts moving, fraudsters and so on are attracted.

From RWW:

According to the latest report from AdMob, 42% of all requests from iPhones to Admob's partners worldwide are coming in over WiFi instead of through the networks of mobile operators. This puts the iPhone in a league of its own, given that on average, AdMob is only seeing about 10-20% of all requests from Wifi capable phones actually coming in from WiFi networks. From T-Mobile's Android phone, for example, only about 10% of all requests were made on WiFi.

The iPod Touch and the PlayStation Portable come in at number two (28%) and three (13.1%) with respect to WiFi usage in the US. Only a few Blackberry devices are WiFi capable, but even from those that are, like the Pearl and Curve, only 1% of the requests were on WiFi.

Implications:

(1) As Smartphones start to look more like PC's, their users will use them more like PC's and that means WiFi as the preferred technical / financial bundle

(2) As more people buy these sorts of devices, they will rely less on 3+ G transmission - as most research shows, c 60% of the time mobile people are not "mobile", just sitting somewhere else. That's easy to serve via WiFi - and with places like Pret A Manger now serving free WiFi with coffee, WiFi appearing in planes & trains etc, the "Mobile" network will increasingly be relegated to fill in service given its current pricing structure.

TechCrunch reports on Joosts' travails:

Joost’s two year old online video service was a pretty darned smart idea when it first launched.

Instead of streaming video through the Joost website, users would download a Mozilla-based client and watch it there instead. The user experience could be more tightly controlled. And more importantly, the Joost client had built in person-to-person file sharing. That meant Joost had lower bandwidth bills. It also meant that Joost didn’t need to worry about overloading servers while showing live events - users would just grab the stream from others automatically.

No, it was a dumb idea from the start, we and many of the Web TV people said so for the reasons that it eventually did fail.

Today they announced they’re discontinuing the software application altogether, but they aren’t saying why. It’s clear that Joost’s strategy has been fluid over the last few months as they try to figure out a way to compete with the much more successful Hulu. It’s honestly not clear that they really can. Joost doesn’t offer anything particularly unique or compelling to users over competing sites with proprietary content (Hulu with Fox and NBC, TV.com with CBS).

Joost raised a big $45 million round of financing way back in 2006. It’s not clear how much of that is left. If they want to succeed they’re going to have to do something pretty radical.

If one was writing this as a case study, the kinder cut would say that it was very early days, they took a calculated risk on a technology option, and the market went the other way. The unkind cut would say that Joost was the classic "Dumb Money" Bubble play - people who knew little about Web TV backed guys with $45m not because they knew about Web TV, but because they were highly regarded for selling a web phone arbitrage service to other guys who knew little about VoIP. To paraphrase Monty Python, this is not usually a successful method of selecting investments.

So what to do now? One option is for Viacom and CBS to "do a Hulu" in essence, and make Joost the Web TV conduit for their content. That will at least build some value in the business which would allow a sale or merge in future, as well as give the option of continuing as a standalone. That will not be cheap. The other option is to do distribution deals with successful players for their content (YouTube is looking....) and leave Joost to the deadpool. One of those is a low cost option, the other is not.

Gloomy prediction for 2009 - Joost sold for scrap in Q2. The "stay the course" option would be more interesting to see but the business case is far harder to justify.