This sheds new light on the stats regularly circulated about the growth of Internet advertising as a whole. Apparently, a fixed pot of money has just been getting re-allocated among various players, while Google has single-handedly been responsible for nearly all of the actual growth since 2002. Amazing.

I can see his reasoning: a way to do good is to make tons of money and give it away to help people. So if you leave potential money unearned, you’re either shortchanging yourself or the people you would have helped. This especially seems like a compelling argument when it comes to advertising, which appears to be “free” money since it is only exchanged for the momentary attention of users.

But the fact is, the absence of ads on CraigsList represents value for users. How big a value is it to not have to see a few ads? My own feeling is that it’s not all that big, but I think it’s safe to say that most people would choose a site without ads over one with ads if given the choice. And since there’s no shortage of CraigsList imitators, that translates to what could be a very important competitive advantage.

So you can view the decision to not run ads as a bet: a bet that in the long term, this will enable CraigsList to keep their lead in the market. Sure, they could run ads now and send a few billion to charity, but that would be short-lived as they lost users. GM could sell all their assets and send it all to charity too, but there wouldn’t be any GM in the morning.

Now I have no idea if Craig or anyone else at CraigsList thinks of it this way, but you can view this decision as the application of a straightforward business philosophy: listen to your users fanatically and give them exactly what they want as long as you can cover costs. By never building any excess profit cushion into your business, you never leave the door open to a competitor to undercut you. And as a bonus, customers love you.

I would even say that as everything about web apps gets easier and easier, this might well become one of the only ways to build a sustainable business on the Internet. The barriers to both building apps and to users switching are getting lower all the time. This leaves critical mass and customer loyalty as two of the only real competitive advantages left. Charging the minimum to users, both in terms of fees and distractions, is a solid strategy. It’s a way to build and defend mass and loyalty against the competitive apps that will inevitably be chasing the same users in short order.

Update:

Some commenters in the original NYT article point out that ad revenues can also be used to address the “unmet needs” of CraigsList users, and that if this investment is not made, CraigsList will lose to a competitor that does fund this additional work via ads. This is a valid point, but I’d argue that the success of CraigsList so far is evidence that the company is keeping profits at the right level to develop *only* those features that user really want. This is a judgement call, and so far at least, it looks like they’ve made the right calls.

Other commenters say that CraigsList is engaging in “predatory pricing”, and that this pricing is putting others like newspapers out of business. I don’t find this a convincing argument. Predatory pricing (or loss-leading or dumping) is when a company sells a product at a loss in order to either build market share or drive others out of the market. CraigsList is profitable. While they are not *maximizing* short-term profits, this may be exactly what is needed to stay a viable business. The fact that classified ads are not bringing newspapers the same revenues as they used to is just further evidence of this; evidence that minimizing excess profits is what’s needed to compete in a market where it’s so easy for ideas to be realized and for users to switch.

Here’s what I talked about. The concept of “digital identity” has been around for a long time, and usually includes all kinds of complicated functionalities. For example, an identity can:

– Prove you are the same person you were last time you visited
– Prove that you are a specific person or have certain attributes
– Prove that you have authorization or a reputation verified by a third party
– Grant permission for one site to pass your data on to another

But what does “identity” mean in reality for most consumer web apps? Well, basically, it usually means a registration form, an email validation, and then another username and password to remember.

This is kind of a pain for users, which makes it worth asking: what’s the *real* reason sites require registration? For most apps, it’s to do one or more of the following:

– Ensure the user is a human and not a bot
– Associate the user with site data (e.g. settings)
– Associate the user with preference data (e.g. interests)
– Contact the user (e.g. to email a forgotten password)
– Target ads to the user (to make more money)
– Associate the user with a specific person (e.g. a blogger)

Looking at this list, the interesting thing is that only the last item really requires an “identity” as most of us think of it. You’d think that the rest could be done without the oftentimes complex machinery of most identity solutions.

Well, it can, and from a certain perspective, that’s what PrefPass is all about! Instead of the same old [form -> email -> response -> password] sequence, why not just [click]? And why not make it completely anonymous? After all, only the last item above requires you to “prove” that you’re someone in particular. With anonymity, there’s no ID to remember, no privacy issues, no namespace to worry about — just [click]!

Microchunking identity means reducing it to its smallest usable parts. For example, there are some cool solutions that focus on proving that you own a blog URL — that’s a microchunk. With PrefPass, we’re focusing on letting you tell a site that you’re the same person as last time, and that you’re associated with some anonymous metadata representing your interests or preferences. That’s it. By keeping it simple, we hope to be able to solve some real problems for both sites and users, while making a big change in how much users can control their own data.

We’re just about to launch a limited beta, so if this sounds interesting to you, please help us out! You can request a beta invite by clicking on the PrefPass button in my sidebar or by going to PrefPass.com. We’re also looking for additional sites who want to try out PrefPass during the beta. If 1-click registration, instant personalization, or user-targeted ads that pay more sound interesting to you, please give me a shout at adam at prefpass dot com.

This is a powerful idea; but why limit it to media? It seems to me that the same logic applies to applications. A big part of what I think is exciting about the latest batch of web apps is that they microchunk what was once a monolithic software application (e.g. Office), make it web-native, and monetize its use via advertising and/or premium service fees.

Going back to digital media, a big part of why it can be effectively microchunked now is that certain enabling technologies are widespread enough to reduce the advantage once held by centralized media: things like editing tools, RSS syndication, and aggregators. The same thing is true for apps; enabling technologies here would include widespread broadband, more active browser techniques like AJAX, and standardized data formats.

I think that there are two main remaining barriers to microchunking apps. The first is the lack of many needed standardized data formats. One big help in this regard could be microformats. The second big remaining stumbling block is that of identity. Big applications, whether on the web or not, have the significant advantage that you just log in once, and then can easily use the different components of the app together.

So how could this identity barrier be knocked down? Well, how about microchunking identity?

As it so happens (or more like, partly motivating this post), microchunking identity is what I just talked about at BarCamp SF. I’ll get to that in the next post.

AttentionTrust is “a non-profit organization dedicated to promoting the basic rights of attention owners.” That means everyone! The particulars of what this means (the “rights” from the AttentionTrust home page) can be mapped pretty much directly to the kinds of things I’ve been talking about here:

– Property: you OWN and CONTROL your attention (and, I’d argue, all your other personal data)
– Mobility: you can TRANSFER your attention (implying that this data is separate from the apps that use it — see microformats)
– Economy: you get something in return if you TRADE your attention (or, I’d argue, allow others to collect it)
– Transparency: you can see how your attention is being used (and, I’d argue, when it’s being collected)

Wow! Attention even has its own microformat: attention.xml, also spearheaded by Steve along with a bunch of folks from Technorati. Needless to say, I joined right up:

I guess a big chunk of this blog has ended up being concerned with a generalization of the AttentionTrust idea: that you should “own” all your data, from your attention to your preferences to your identity to your social network. This ownership should then imply all the “rights” listed above.

Kudos to everyone involved with AttentionTrust! More from Steve, Seth, Ed Batista, and of course the indispensible TechCrunch.

Tivo uses behavioral data locally to make recommendations against the program guide, which is also locally stored. In contrast, Invidi wants to use this data to select ads, which are *not* locally stored. Their clever solution, which also fits in well with the cable architecture, is to add “channels” of ads designed for specific user segments, then locally decide on which segment best fits the user’s behavior. As I understand it, the integration happens essentially by covertly switching channels during ads to the appropriate “ad channel.”

Following up on my previous post, this idea of “local personalization” is interesting because, being both locally stored and remotely inaccessible, my data is presumably more under my control than if it was either remotely stored (as with Amazon) or remotely accessible (as with cookies).

The problem, of course, is that the system only works if the personalization is very coarse; for ads, this means a small number of user segments, since every ad on the net can’t be sent to each user. Something closer to Google AdSense, which essentially segments users according to all possible search keywords, wouldn’t work: if ads appeared matching the arbitrary terms you searched for in the program guide, it would be clear that the cable operator “knew what you watched,” and this raises privacy concerns because they also “know who you are.”

It’s interesting to compare this situation to the web. Web ads can also be targeted according to user behavior; the big difference is that behavioral data on the web is carried in a cookie, which is remotely accessible to the publisher but anonymous; DSTB data is deliberately not remotely accessible, because it is necessarily not anonymous — the cable company knows your name, address, phone number, etc. and the ID of the cable box you have. This problem is avoided on the web because your ISP and your content provider are two different entities, and the ISP has ended up with the implicit duty to not sell your account data to content providers. So an ad network might “know what you surf,” but that’s OK because they don’t “know who you are” (and you can change what they know by deleting your cookies).

So it turns out that by controlling the entire system and thus not being able to safeguard the anonymity of users like ISPs do, cable operators are forced into a model that is less powerful, since it can only personalize locally. This becomes even clearer if we consider personalization beyond ads. For example, the new Google Personalized Search, like A9, stores your search history and then personalizes new results (and presumably ads) based upon this history. There’s no way I can see for this to be done locally; the search algorithm must have direct access to your history.

On the other hand, ad targeting on both the web and Invidi also uses available demographic information. On the web this is limited to things like connection, browser, and geographic location; but for cable TV user data is much richer, since they have exact address, account info, and full U.S. census data to draw upon. So as with direct mail, cable operators have the advantage of publicly available data about you, while web publishers have the advantage of interactivity and behavioral data.

It’s interesting to consider the ways this situation could change:

– Storage and bandwidth could increase to the point that it *was* possible to send every ad to every DSTB or browser. This would allow local personalization of ads (but not other services such as search, unless the entire Google index could be locally stored!)

– Cable operators could imitate ISPs, and allow open but anonymous access to DSTB data to third parties for personalized services and/or ad targeting. This would be a huge change, and one that seems easiest to implement by just making the TV a web device, like WebTV.

– ISPs, who know your IP address, could imitate the cable model, and sell access to your demographic information for targeting purposes. I’m actually surprised this isn’t already happening (maybe it is? hope not!).

The privacy that we expect seems to be largely driven by past history. Credit card companies and the bank know what we buy, but we expect them not to share it with others. Cable TV evolved from broadcast TV, and so we still expect not to have our viewing monitored. We’re used to the Internet being anonymous and user-controlled and don’t want that to change. Many of these issues were “decided” by technological limitations, but it seems to me that as the dreaded “big database in the sky” becomes increasingly possible (and profitable), a coherent and consistent public policy on personal data becomes increasingly important.

The idea was that as the media available on demand balloons, metadata will become increasingly important in selecting media, and thus in determining the economic value of the media or the advertising space supporting it. This is more pronounced with media than with say text: I have no problem glancing over a book on Amazon to see if I’m interested, but checking out a CD using the little samples provided is pretty laborious, and afterwards I still feel like I might not have a very good idea of what the music is really like.

Metadata also affects media consumption as well as selection, at least for me: my MP3 files never seem to have decent ID3 tags, so I’m always looking for ways to quickly and easily play music that is of a certain genre, time period, or mood. This has led me to try various tag-fixing utilities and services like MoodLogic; but in the end what it means is that unless I have a certain artist, song, or album in mind (corresponding to reliable metadata), I just listen to Internet radio instead, since stations represent manual efforts to group music along other dimensions like genre or mood. So the economic value of these utilities and of Internet radio is at least partly driven by their ability to offer better metadata, and the value of my MP3 files is reduced by their bad metadata.

All very interesting…but meanwhile I’m still looking for good streams for instrumental speed metal, math rock, and vocal-free electronica that’s I guess something like drum’n'bass but with a less frantic BPM and missing the grating buzzes and bleeps. I’m not kidding. If you know of any, let me know. Please.