A study of 58,000 U.S. Facebook users, reported in the Proceedings of the National Academy of Sciences, arises from an emerging discipline in which experts sift through extremely large digital data sets, such as collections of web searches or Twitter messages, for subtle patterns and relationships. It highlights the power and risks of digital demographics, which are the key to targeted online advertising, experts said.

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Lost in the sauce of the national work-from-home debate of last week that engulfed all things Yahoo, was a fascinating tidbit that several employees passed on to me from a recent Friday FYI meeting at its Silicon Valley HQ.

At the gathering, CEO Marissa Mayer talked briefly about the new telecommuting arrangements for some staffers, including the controversial new work-from-home memo that HR head Jackie Reses had issued that day.

But when Reses — who also wears another corporate hat as head of M&A at Yahoo — spoke she mentioned to the crowd that Yahoo was working on two “significant” acquisitions and about six smaller talent “acqhires.”

“It was kind of odd to telegraph it in such a big forum,” said one employee of Reses’ comments at the meeting in late February.

The revelation was unusual, to be sure, but perhaps not a surprise, given the recent run-up in Yahoo stock, its healthy cash position and, most of all, its need to add meaningful growth to the current efforts at turnaround.

And while some of its recent buys have been interesting and focused on improving its moribund mobile efforts, they have also been very small. And, as one high-ranking exec there told me, they “don’t move the needle in the way we need to in bringing in senior talent or loads of users or serious revenue.”

Indeed, while Yahoo shares have benefited greatly from the impressive performance by Alibaba Group in China, which is clearly on a roll, many think that showing actual improvement in its core business will be critical in the months ahead.

While making changes to Yahoo’s homepage and email, as well as cutting products, has been done, it is not yet clear what the impact is; the changes are aimed more at holding on to consumers rather than exciting them with new offerings.

Yahoo could also create its own new products to wow the masses, but that has been harder for it over the years. (Remember Livestand? Yeah, not so much.) In any case, an innovation infusion of such a large magnitude will take some time, given Mayer has to get the right people into place to do so.

Thus, a big purchase of an exciting new company with prominent leadership seems more likely than not and sooner than later. While Mayer has not articulated her vision for the new Yahoo in anything more than general ways, what she buys will say a lot.

Thus, sources said that Yahoo has been looking at a range of such acquisitions, in a number of categories such as advertising tech, mobile monetization and, of course, consumer “daily delight,” which is a phrase Mayer has used a lot.

It would be bold if Mayer went all out and made a mega-buy that would shake up the competitive landscape. My first choice for that is Pinterest, the scrapbooking phenom that was just valued at $2.5 billion in a new funding round. Mayer has also shown a lot of interest in blogging superstar Tumblr, while at both Google and Yahoo, as well as Foursquare, the well-known location app. Of course, there is also the troubled gaming giant, Zynga.

All are very pricey and would face rival interest, but such a move would be akin to Facebook’s billion-dollar blockbuster purchase of Instagram. Many now think that was prescient and cheap, given how important mobile photos are to the current digital ecosystem.

The list of possible big deals goes on: Hulu (which needs a tasty content element to make sense) as a video play; Millennial Media or Jumptap for mobile advertising; Quora for social answers; Flipboard for social media consumption; Rubicon or PubMatic, for ad targeting; and many more.

But all of those begin at the billion-dollar or more range and I have checked with a number of these and come up peanuts. Still, there are a whole lot of choices for Mayer and Yahoo in the $200 million to $500 million price range.

Here, Yahoo has the financial strength to make at least two of these significant purchases that Reses mentioned, as well as developing a much better reputation for Yahoo to keep real talent interested.

As one prominent startup exec, who had told me he never would consider selling to Yahoo in the past, said recently: “They are no longer complete losers, although Facebook and Google and Apple and Amazon are still cooler.”

Hey, it’s a compliment, even if it’s a back-handed one, so it will be interesting to see who finds Yahoo cool enough.

Image copyright kentoh

Maybe we should think about a solution that involves smaller amounts of higher quality data instead of more data or better algorithms.

First, it’s important to understand what data is feeding the marketing ecosystem and how it’s getting there. Most third-party profiles consist of data points inferred from the content you consume, forms you fill out and stuff you engage with online. Some companies match data from offline databases with your online identity, and others link your activity across devices. Lots of energy is spent putting trackers on every single touchpoint. And yet the result isn’t very accurate — we like to make jokes around the office about whether one of our colleagues’ profiles says they’re a man or a woman that day. Truth be told, on most days BlueKai thinks they are both.

One way to increase the quality of data would be to change where we get it from.

Instead of scraping as many touchpoints as possible, we could go straight to the source: The individual. Imagine the power of data from across an individual’s entire digital experience — from search to social to purchase, across devices. This kind of data will make all aspects of online advertising more efficient: True attribution, retargeting-type performance for audience targeting, purchase data, customized experiences.

So maybe the solution to “More Data” vs. “Better Algorithms” isn’t incremental improvements to either, but rather to invite consumers to the conversation and capture a fundamentally better data set. Getting this new type of data to the market won’t be easy. Four main hurdles need to be cleared for the market to reach scale.

Control and Comfort

When consumers say they want “privacy,” they don’t normally desire the insular nature of total anonymity. Rather, they want control over what is shared and with whom. Any solution will need to give consumers complete transparent control over their profiles. Comfort is gained when consumers become aware of the information that advertisers are interested in — in most cases, the data is extremely innocuous. A Recent PWC survey found that 80 percent of people are willing to share “information if a company asks up front and clearly states use.”

Remuneration

Control and Comfort are both necessary, but people really want to share in the value created by their data. Smart businesses will offer things like access to content, free shipping, coupons, interest rate discounts or even loyalty points to incentivize consumers to transact using data. It’s not much of a stretch to think that consumers who feel fairly compensated will upload even more data into the marketing cloud.

Trust and Transparency

True transparency around what data is gathered and what happens to it engenders trust. Individuals should have the final say about which of their data is sold. Businesses will need to adopt best practices and tools that allow the individual to see and understand what is happening with their data. A simple dashboard with delete functionality should do, for a start.

Ease of Use

This will all be moot if we make it hard for consumers to participate. Whatever system we ask them to adopt needs to be dead simple to use, and offer enough benefits for them to take the time and effort to switch. Here we can apply one of my favorite principles from Ruby on Rails — convention over configuration. There is so much value in data collected directly from individuals that we can build a system whose convention is to protect even the least sensitive of data points and still respect privacy, without requiring the complexity needed for configuration.

The companies who engage individuals around how their data is used and collected will have an unfair advantage over those who don’t. Their advertising will be more relevant, they’ll be able to customize experiences and measure impact to a level of precision impossible via third-party data. To top it off, by being open and honest with their consumers about data, they’ll have impacted that intangible quality that every brand strives for: Authenticity.

In the bigger picture, the advertising industry faces an exciting opportunity. By treating people and their data with respect and involving them in the conversation around how their data is used, we help other industries gain access to data by helping individuals feel good about transacting with it. From healthcare to education to transportation, society stands to gain if people see data as an opportunity and not a threat.

Marc is the co-founder and CEO of Enliken, a startup focused on helping businesses and consumers transact with data. Currently, it offers tools for publishers and readers to exchange data for access to content. Prior to Enliken, Marc was the founding CEO of Spongecell, an interactive advertising platform that produced one of the first ad units to run on biddable media.

Michael Katz, one of Yahoo’s high-ranking online advertising execs, is leaving the company, according to a memo he sent out to staff on Friday.

Considered a savvy online ad player and a well-regarded entrepreneur, Katz came to the Silicon Valley Internet giant a year ago when it bought Interclick, the ad-targeting company he co-founded and headed, for $270 million.

Yahoo later used Interclick’s technology in its audience-buying platform called Genome. In a reorganization announced in January, Katz was placed in charge of sales operations and data and performance optimization for Genome.

The data unit is at the center of efforts by Yahoo’s new CEO Marissa Mayer to turbocharge its ad business.

But the Katz missive, which is below in its entirety, clearly signaled that his departure was not an amicable one, which sources underscored was part of a larger rejiggering of the ad sales staff under new COO Henrique De Castro.

“As some of you are starting to learn, my last day with the company will be today,” wrote Katz on Friday. “Leaving Y! is not the hard part — how it happened and leaving all of you is what makes this difficult.”

How it happened, said several sources, was that Katz was suddenly told by HR head Jackie Reses last week that there was not a place for him, only days before a large 12-month retention bonus was to be paid out to him for the Interclick acquisition.

While it is an unusual thing to part on willfully difficult terms with an entrepreneur, as it sends a bad signal to others considering joining the company, Yahoo’s new leadership has been playing hardball with a lot of top execs it is parting ways with, and is also limiting departure packages.

Former marketing head Mollie Spillman, for example, was suddenly let go after she was replaced by former Lockerz CEO Kathy Savitt. And, though he had wanted to leave, former CFO Tim Morse was also told of his replacement in a swift exec house-cleaning move, as was former HR head David Windley.

Of course, such moves are not unusual when a new set of leaders enters the corporate picture. That’s why many at Yahoo expect even more changes to come soon in the ad unit, with most assuming that Mayer and De Castro will bring in new staff they had previously worked with at Google.

Currently, top Yahoo ad execs include Peter Foster, GM of audience advertising at Yahoo; and Mark Ellis, VP of North American sales and global partnerships.

It will be interesting to see what happens to them and others as part of a large ad reorg at Yahoo now taking place, which will definitely include a variety of departures and arrivals. One recent notable Yahoo ad exec departure, for example, was Debbie Menin, who headed entertainment and travel sales strategy, and is now a top sales exec at hot video entertainment network Machinima.

More will come in the new year, given that De Castro has recently briefed employees on a plan to move its sales organization to a “category” model. Simply put, that means its sales reps will sell all of Yahoo’s ad products, as well as its search offerings, in a vertical process organized around advertiser segments.

That massive shift is not Katz’s to worry about anymore, it seems. Here’s his entire email to staff, which is a pretty eloquent one, as goodbye letters go:

Friends and Colleagues,

6 years ago if someone would have told me that the hardest part about building a business would be to one day say goodbye, I would not have believed them. As some of you are starting to learn, my last day with the company will be today. Leaving Y! is not the hard part — how it happened and leaving all of you is what makes this difficult. I will miss the daily interactions and will take with me the many memories. This has honestly been so much fun.

I have learned a lot along the way:

Sometimes winning looks like losing. If you don’t fail, you can’t progress and the stakes only get bigger as you go further down your path.

Be genuinely happy for those that are successful at reaching their goals. If you spend anytime wishing it were you, it will never be.

Stay humble, and never declare victory.

Approximately correct is better than definitely wrong. Do not let perfection be the enemy of excellence.

We are all human — we may make mistakes, we must forgive, forget, and move on together.

Treating people right is not an option.

Treat adults like adults and they will behave like adults. Rules are for children.

People and culture are everything. It’s about so much more than free food and parties, it cannot be forced and without it a business cannot succeed.

I consider myself so very lucky to have known a handful of loyal friends that took a chance, quit their jobs and risked a lot to build this business with me. Their loyalty and hard work helped interclick get off the ground and for that I will forever be grateful. The team they helped to build has truly made this the greatest place to work. Each and every one of you made interclick the very best company to work for.

I would like to leave you all with a reminder of what together we built:

– A company that started with $27,000 and sold for $270,000,000

– A company that redefined the way that marketers think about audience targeting and data

– A company that went public in 2009 on NASDAQ defying all odds

– A company that spit in the face of adversity early in 2011 and came out victorious

– A company whose people are the future of this organization.

So be proud of what together we achieved, look back and know you were part of something big. Then look ahead and know that this is just the beginning, we will all one day build again. For those of you that continue your career at Y!, I ask that you don’t lose sight of greatness. Remember what you are capable of and continue to make me proud.

Thank you for your loyalty, passion, dedication, and collaboration. The finish line is only the beginning of a new race.

-MK

In what will be a major shift in how the Silicon Valley Internet giant sells online advertising, Yahoo’s new COO Henrique De Castro has briefed employees on a plan to move its sales organization to a “category” model, according to numerous sources close to the situation.

Simply put, that means its sales reps will sell all of Yahoo’s ad products, as well as its search offerings, in a vertical process organized around advertiser segments, such as automotive, entertainment and packaged goods.

This is how Google, where both De Castro and CEO Marissa Mayer recently worked, conducts its ad sales efforts. (After copying free food and smartphones, staff evaluation efforts and more, What Would Google Do seems to be strategery at Yahoo these days.)

In contrast, Yahoo has long sold its advertising in a regional and tiered organization against premium and performance inventory in display and search.

The move from regional to vertical is a “seismic shift,” said one source quite accurately. That’s because Yahoo’s go-to-market efforts have been designed to avoid vertical conflict and its sales staff have built up advertiser relations across many areas. In a vertical organization, those reps will be forced to give up these long-term relationships with marketers, some of which have been built over years.

There are, of course, many different ways to organize sales — and each has its fans and detractors. But one thing is clear: Making such a major change has potentially large ramifications on Yahoo’s financial performance, at least in the short term, since advertising makes up the bulk of its revenue.

The change might also result in some attrition among the sales staff, said sources, although many at Yahoo are expecting that De Castro will bring in his own execs from outside to help with the transition. (One interesting name I heard floated was former Googler Penry Price, who was close to De Castro when they both worked there. He is currently president of Media6Degrees, an ad targeting start-up.)

De Castro (pictured here) will need all the help he can get as he overhauls Yahoo’s sales efforts. Well-regarded Chief Revenue Officer Michael Barrett left Yahoo in mid-October after De Castro got the COO job.

His departure has left a large gap in sales leadership and in maintaining strong relationships with big advertisers and agencies. De Castro himself is not as well known in the ad marketplace, despite many years at Google in sales (more on that to come).

Currently, the key ad execs at Yahoo under De Castro are Peter Foster, who heads audience advertising, and Mark Ellis, VP of North American sales and global partnerships.

De Castro outlined the new ad org plan to staff immediately after a multi-day offsite with top sales leaders last week, at which Yahoo’s acquisition options in the ad tech market were also discussed.

Sources said De Castro noted that the changes could take place as early as January 1.

De Castro is also planning to have Yahoo’s annual global sales meeting for the end of January in Las Vegas. Last March, the gathering — then set for about 1,300 advertising staffers in Florida — was cancelled due to a restructuring under ousted CEO Scott Thompson.

In addition, sources said, Yahoo is planning on having a much more prominent presence at the upcoming Consumer Electronics Show — also taking place in Las Vegas in January — in order to solidify its relationships with advertisers.

Its big weapon at the giant annual confab will apparently be Mayer, who has not yet interfaced significantly with the company’s big ad clients since taking the top job in July. At CES, sources said, Yahoo is hoping the “Marissa Halo” — i.e. excitement around the telegenic exec — will help boost its business.

In a post today on its policy blog, Yahoo took aim at Microsoft’s controversial “Do Not Track” default in its Internet Explorer 10 browser.

Said Yahoo in a post titled “In Support of Personal Experience”:

“Recently, Microsoft unilaterally decided to turn on DNT in Internet Explorer 10 by default, rather than at users’ direction. In our view, this degrades the experience for the majority of users and makes it hard to deliver on our value proposition to them. It basically means that the DNT signal from IE10 doesn’t express user intent.”

Thus, Yahoo “will not recognize IE10’s default DNT signal on Yahoo! properties at this time.”

Such a move should make Yahoo very popular with advertisers, most of which are publicly and privately decrying the Microsoft effort for their browser having advertising targeting and tracking turned off by default.

In fact, Yahoo’s statement of no-default-respect pretty much tracks on what the Digital Advertising Alliance, which represents thousands of major marketers, said recently, as well as the Association of National Advertisers.

Both those groups and many others are seeking to kill DNT.

According to sources, the impetus for the Yahoo decision was CEO Marissa Mayer, a former Google exec.

Interestingly, Google recently added DNT support to the latest version of its increasingly popular Chrome browser developer build.

And the third major browser, Mozilla’s Firefox, also offers a DNT product as a key feature.

Right now, Mayer is in discussions with the software giant about improving the weak results of its search advertising partnership, too. This should make those talks much more interesting.

In fact, in a longer privacy post today, titled “Privacy and Technology in Balance,” Microsoft’s general counsel Brad Smith noted:

“Just because the signal is turned on doesn’t mean that a consumer wants no services that involve tracking. It means instead that consumers are empowered to make their own choices, including selecting services that involve tracking from advertisers and ad networks they trust.”

Here’s the whole post, and here is a really good New York Times piece on the controversy, including talks taking place via an international group working on global DNT standards, called the World Wide Web Consortium:

In Support of a Personalized User Experience

Friday, October 26th, 2012

At Yahoo!, we aspire to make the world’s daily habits more inspiring and entertaining. Our users have come to expect a personalized Yahoo! experience tailor-made for their lives — whether they’re checking local weather, sports scores, stock quotes, daily news, or viewing ads on our site. We fundamentally believe that the online experience is better when it is personalized.

That said, we also believe that there should be an easy and transparent way for users to express their privacy preferences to Yahoo!. That’s why we offer our own tools and resources such as Ad Interest Manager, to give users more control over personalized advertising on Yahoo!, and why we participate in industry-wide programs such as AdChoices, which allows users to learn why they’ve been shown an ad.

Yahoo! has been working with our partners in the Internet industry to come up with a standard that allows users to opt out of certain website analytics and ad targeting. In principle, we support “Do Not Track” (DNT). Unfortunately, because discussions have not yet resulted in a final standard for how to implement DNT, the current DNT signal can easily be abused. Recently, Microsoft unilaterally decided to turn on DNT in Internet Explorer 10 by default, rather than at users’ direction. In our view, this degrades the experience for the majority of users and makes it hard to deliver on our value proposition to them. It basically means that the DNT signal from IE10 doesn’t express user intent.

Ultimately, we believe that DNT must map to user intent — not to the intent of one browser creator, plug-in writer, or third-party software service. Therefore, although Yahoo! will continue to offer Ad Interest Manager and other tools, we will not recognize IE10′s default DNT signal on Yahoo! properties at this time.

Yahoo! is committed to working with the World Wide Web Consortium (W3C) to reach a DNT standard that both satisfies user expectations and provides the best Internet experience possible. We will closely evaluate our support for DNT as the industry makes progress in reaching a meaningful, transparent standard to promote choice, reduce signal abuse, and deliver great personalized experiences for our users.

Image via venimo

So the company’s announcement on Tuesday that it’s in a test period of serving Facebook ads on mobile apps and Web sites outside of Facebook will most likely only fuel the speculative fire.

Right now, Facebook is working with a small number of ad exchanges which already have relationships with publishers, who will then sell those Facebook ads to third party apps and Web sites. Those ads are like the ones you see inside of Facebook, only optimized for the mobile Web or for apps which already serve ads.

It obviously makes sense for the company to beef up on its mobile monetization strategy, what with the major shift of Facebook’s user base moving to viewing the site on native apps and the mobile Web. And like Mark Zuckerberg said at the TechCrunch Disrupt conference last week, Facebook is dramatically shifting its internal structure and staffing organization to become a “mobile first” company (heck, they even moved longtime Facebooker and important company figurehead Andrew “Boz” Bosworth over to become head of mobile monetization).

Alongside of Facebook’s off-site mobile ad tests, Facebook also launched an update to its promoted posts on Tuesday — meaning small companies and app developers can essentially buy ads for their products directly from a smartphone. Talk about “mobile first.”

The mobile ads initiative is also an appeal to third-party app developers, a massive untapped market that Facebook could target as another source of advertising revenue. A Facebook off-site mobile ad for a third-party app, for example, will redirect those who click on it to Apple’s App Store or Google Play, where users can download apps. It’s an alternative for developers to attract users to their apps, rather than hoping the app will appear in users’ News Feeds organically.

And there’s the obvious appeal to outsiders: Facebook is sitting on a treasure trove of user data, which makes serving the right ads to the right people a whole lot easier for ad exchanges — though the company only uses some, not all, of a user’s data to target the ads, and anonymizes user data. (Not everyone, however, is convinced that Facebook has the whole relevance thing nailed down quite yet.)

We got the first hint of this a few months ago, when Facebook first debuted its ads on Zynga.com’s in-game pages, marking the first ever time that the social network has displayed ads outside of its own site.

But to be clear, it’s not a proper Facebook ad network. Right now, it’s a small test group of unnamed ad exchanges and applications. So it’s pretty much Facebook testing the waters to see what demand there is for Facebook ads outside of its own site.

Good info if — or more likely when — the company eventually does launch its own ad network.

Now, a nonprofit news site is pulling back the curtain on how the campaigns use different forms of the same email to ask for juuuuust the right amount.

ProPublica’s Message Machine is an eye-opening experiment in crowdsourced journalism. Its algorithm takes in emails users have received from political campaigns and committees, and spits out answers to two interesting questions: How many versions of that same email were sent out, and why?

After all, we aren’t just voters anymore — we’re customers.

For decades, political campaigns have collected and used data about potential supporters to target their efforts toward specific areas and demographic groups. But since 2000, reliance on things like targeted emails and online voter databases has become the new normal.

As the New York Times Magazine’s Jon Gertner noted in 2004:

… someone who appears nonpartisan, someone who might even think of himself as nonpartisan, may nevertheless have a political DNA that the parties will be able to decode.

So, the Message Machine will work in the opposite direction — matching up users’ “political DNA” (i.e., demographic info, which they’ll have to provide) with the one email they’ve received. Then, it will show how that email is different from similar emails sent to people with different DNA.

Previously, ProPublica had asked readers to forward the emails they received from any and all political campaigns to emails@messagemachine.propublica.org. But the (admittedly cool) products, like “You Probably Don’t Know Janet” emerged long after the original emails had dropped off most peoples’ inboxes.

Web developer Jeff Larson calls the new Message Machine a “living news app,” since it will have answers in “semi-real time,” provided that it has received enough similar emails to figure out a trend.

In its first few months (without the real-time functionality launching today), the Message Machine’s users submitted about 9,000 emails, Larson said. But about a third of them aren’t usable, because they come from local or state elections, and the Machine doesn’t have enough examples to look at.

One of the advantages to the “living news app,” though, is that that can easily change.

“If there is a hot race, there are a lot of emails and it looks like there’s a lot of targeting going on, we’ll include that in the app,” Larson said.

The Menlo Park, Calif., social network plans to later this month offer developers and advertisers the ability to place ads for apps directly in a users’ News Feed on their mobile devices, whether the consumer has noted an interest in that company or not, said people familiar with the company’s plans.

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But there’s another, less-understood force prodding the cable guys to move: Advertising. That’s right, advertising. While competition from Internet video is the proverbial stick behind the cable industry’s push to provide IP-enabled “TV Everywhere” — TV on PCs, smartphones and iPads, in addition to the stationary living-room set — the tantalizing carrot for big companies like Time Warner and Comcast is the potentially lucrative new revenue stream generated by Web advertising that simply isn’t possible with current cable technology.

Consider the decidedly low-tech way cable-TV advertising works today. Right now, most of the ads you see are sold by the big content providers, like NBC and CNN. Everyone viewing the same program, whether it’s “Today” or the NCAA Final Four, is seeing the same ad. By definition, those non-targeted ads aren’t very effective (even though some, such as those sold during the Super Bowl, can be very memorable). The 15 percent or so of ads sold by the local cable companies can be more targeted, but only down to a neighborhood level. Your cable company knows your address and zip code. But usually all this means is that your cable provider can beam you a pitch for a nearby dentist or car dealer as you’re catching your late-night shows. Generally, these local ads stick out like a sore thumb in the middle of your programming.

Imagine a future, though, in which you also frequently watch TV on your iPad or through a browser on your laptop (this is obviously happening now, for you early adopters). In this case, cable companies know much more about you because they can track your IP address as you move around the Web. This is Web Advertising 101: You see much more relevant advertisements as you peruse various Web sites because all of your previous activities (reading, searching, shopping) have been captured by the sites you visit.

Men aren’t seeing ads for women’s shoes, for instance; someone doing Web searches in advance of a trip to Hawaii might see pitches for hotels or rental cars. And since there are now often multiple Internet-enabled devices in a given home, ads can be targeted directly to the device that a particular family member uses most often. Dad would see ads meant just for him on the smartphone he gets from the office, while the kids watching streaming Disney videos on the family iPad would see ads for toys and bikes.

There are important privacy concerns related to some aspects of Web advertising, of course (some argue that Web advertisers know too much about us), but the basic model is unchallenged and quite successful. Online advertising has surged in the last several years: In the first half of 2011 alone, Internet ad revenues in the U.S. soared to nearly $15 billion, up 23 percent from a year earlier, according to the Interactive Advertising Bureau. Just think about the new power cable companies can get from this targeted, or even hyper-targeted, advertising.

Earlier this year, analyst Laura Martin of Needham & Co. predicted that the rollout of TV Everywhere over the next three to five years could add $12 billion in revenue to the U.S. television ecosystem — most of it in advertising. Martin noted that this new revenue would be additive, and not in place of, existing cable-industry revenues, and would dwarf the revenues of video sites like Hulu and YouTube. She added that people watching content on demand, as people generally do on non-TV devices, are more likely to view ads than people who record shows on DVRs. This all means that cable companies can likely increase their share of the advertising pie by going digital. And there’s upside for the consumer, too. I know I’d rather see ads for products I’m likely to buy than the random ads I currently see when watching TV at home. Relevance is a win-win for operators and their subscribers.

At my company, RGB Networks, we are in the business of selling gear to cable companies and other TV service providers to make it easier for them to deliver IP-based TV to multiple devices. We’ve been extremely busy lately, and have seen cable companies take big steps toward embracing the Internet: Early this year, Comcast struck a deal with Disney — which owns ABC, ESPN and other key TV channels — to let subscribers watch those channels on Internet-enabled, non-TV devices, like phones and tablets, outside the home. Charter did a similar deal with Turner Broadcasting. RGB competitors Harmonic and Envivio — which just revived plans to go public — also aim to profit from this trend.

We think 2012 will be a breakthrough year for TV Everywhere — we’re involved in many deployments with large operators around the globe (with the smaller ones beginning to follow suit). And as they have worked through their smaller trials and vetted both the technology and the business model, we now see them going bigger — with more channels and more devices — and turning to targeted advertising to help recoup some of the investment they’ve made in new infrastructure to keep their networks state-of-the-art.

We are not yet at a place where we can simply transfer our at-home, cable-TV lineup to our iPads and watch all the same shows on the go that we can in our living rooms. That will take a lot more negotiation between the cable companies and the content providers. But that’s clearly the way things are going.

And as the technology side of the house has worked through its issues and stands poised for broad deployment, we see the barriers breaking down on the content side as well. We expect to see a similar pattern for targeted advertising — the technology is in place, and the new ad model will follow as the stakeholders work through their negotiations, with everybody coming out a winner.

Jef Graham is the CEO of RGB Networks, a Sunnyvale, Calif., company making network-infrastructure products to allow video providers to deliver content to multiple screens.

This might be important for Facebook and its ad buyers, and the ad tech companies that will work on the project. And for the Web publishers who will be competing for Facebook’s ad dollars.

But for most users, it shouldn’t register, because they’re used to the idea: If you visit an online shoe store, you might find yourself stalked by shoe ads, enabled by Web targeting “cookies,” when you head to other sites.

No big deal, right?

Depends on who you ask.

Here, via ZDNet, is a transcript of Mark Zuckerberg and Sheryl Sandberg talking about targeting and cookies with Charlie Rose last fall. I’m running a long stretch so you get the full context:

Mark Zuckerberg: I mean, when you’re saying that we’re the light, it’s because, sure people have a lot of information on Facebook. But that’s information that they’ve put into the service.

Sheryl Sandberg: Exactly.

Mark Zuckerberg: If you look at companies, whether it’s Google or Yahoo or Microsoft, right, that have search engines and ad networks, they also have a huge amount of information about you. It’s just that they’re collecting that about you behind your back, really. And it’s like you’re going — you’re going around the Web, and they have cookies, and they’re collecting this huge amount of information about who you are. But you never know that. And I mean, some of these companies make an effort to give you a product where –

Charlie Rose: But do you find that a bit scary?

Mark Zuckerberg: Well, I just — I think it’s — it’s just less transparent –

Sheryl Sandberg: There’s no light.

Mark Zuckerberg: — than what’s happening on Facebook.

Sheryl Sandberg: It’s the dark.

Mark Zuckerberg: So on Facebook someone wants to –

Sheryl Sandberg: Contact.

Mark Zuckerberg: — target say, okay, I want to — I want to advertise —–like I’m a band, and I’m to coming to the Bay Area, I’m going to advertise to people who like a band, and they’re going to — those people only fit if they’ve put in that they like that band.

Charlie Rose: Right.

Mark Zuckerberg: On those other services, you can still do that kind of advertising, but you’re going to find people based on what they’ve browsed around on the Web and the people have little or no control over the information that a company like Google or Yahoo or Microsoft has about you. And, I don’t know, I think that some of those companies have made an effort to give people to give a page that they can go see all information that the company has about them. But, I mean, very few people are actually going to go do that. So in reality I think that these companies with big ad networks are basically getting away with collecting huge amounts of information, likely way more information than people are sharing on Facebook about themselves. But I think because people can see how much information people are sharing about themselves on Facebook –

Sheryl Sandberg: Yes.

Mark Zuckerberg: it appears scarier. But in reality, you have control over every single thing that you’ve shared on Facebook.

That was then. Now, Facebook says, it’s just fine to “find people based on what they’ve browsed around on the Web.”

Some caveats:

• Facebook says that once you find that you’ve been targeted with a cookie-enabled ad, you should be able to opt out of getting them in the future. This kind of opt-out usually turns out to be quite cumbersome and non-intuitive in real life, but we can reserve judgement until we see how Facebook handles it in the near future.
• Much more important is that Facebook says it won’t let advertisers mix the data they collect about you from outside of Facebook with the stuff that Facebook learns about you on its own. Advertisers will either have to pick the cookie targeting method, using data they collect outside of the social network, or Facebook’s original method, based on the information it gleans about you from within its walls.

I also checked in with Facebook PR rep Brandon McCormick, who wanted to make two more points:

• Facebook’s plan is to only let advertisers use a single cookie to target you, and it won’t be able to hang on to the tracking information once it has served you the ad. That is, advertisers won’t be able to build up an entire portfolio about you by combining data from multiple visits to multiple sites.
• Facebook wants to make it clear that it’s not collecting the cookie data that advertisers are using — it’s just letting them serve ads with that data.

And again, for many — likely most — users, none of this will be an issue, because they’re used to seeing targeted ads, whether they’re conscious of it or not.

But this is still a turnaround for Facebook. Last fall, it disdained Web targeting. Now it wants to profit from it.

That brings Simulmedia’s total raise to some $27 million over three years. That money is going into Morgan’s take on “targeted” TV advertising, which promises to merge Web-style targeting with traditional TV ads.

There are lots of people chasing targeted TV ads, and to date none of them have gotten very far. Canoe Ventures, a consortium led by Comcast, Time Warner Cable and the rest of the cable industry, just imploded earlier this year.

The TV guys will probably get there, someday. But in the meantime, Morgan is trying a slightly less ambitious version that he says can work now.

Rather than trying to deliver customized ads to every TV viewer based on their individual set-top-box data, Simulmedia uses some set-top-box data (which it gets from providers like DirecTV, TiVo and AT&T) to try to find undervalued ad inventory. So, in theory, it can help an advertiser find a cheaper way to get in front of a specific audience it wants to reach.

If that sounds a bit like Web advertising, that makes sense. Morgan built two pioneering Internet ad companies — 24/7 Real Media and Tacoda, which were acquired by WPP and AOL — before tackling TV.

Simulmedia says it has run 200 campaigns for 24 brands since it pivoted to its current model (it had originally tried using the same technology to target TV advertising for TV programming), and Morgan says he is “very close to profitability.” This is the second time Morgan has funded the company with an inside round: The same group of investors put in about $9 million a year ago.

Except that’s not true at all: The Web offers advertisers a slew of creepily effective targeting mechanisms, but they only work for some stuff, some of the time. An ad on the Web may do a better job of reaching its audience than, say, a magazine ad. But that doesn’t mean it does a good job.

Example: Here’s data from Nielsen, via Bernstein analyst Carlos Kirjner, which tracks the accuracy of a recent ad campaign by “a manufacturer of women’s personal care products.” It was supposed to target women between the ages of 25 and 54. But most often it didn’t — the most accurate publisher got the ads in front of the right people 40 percent of the time. Overall, the campaign only hit the target 25 percent of the time. And nearly half the time — 47 percent — the ads got served to men.

Kirjner uses the anecdote to bolster his bullish case for Facebook, which he thinks can do a much better job of targeting than regular sites can, because it knows so much more about its 800 million-plus users.

Maybe. I’ve noticed that Facebook has stopped sending me ads that offer to get me a job at the CIA, or to meet Christian singles in my area, so that’s good. Right now, it’s showing me a banner for the McDonald’s Angus Deluxe, which is more accurate, since I do like food. But not that food.

The Web’s sorta-close, sorta-not targeting problem hasn’t hampered Google, obviously. But that’s because Google’s search ads respond directly to your input and your intent. Now, Facebook, Google and everyone else are going after the branded ads that dominate TV, where the really big money lives. And if they want to get bigger bites of that, they’re going to have to get more accurate.

The lawmakers — Edward J. Markey (D., Mass.), Joe Barton (R., Texas) and Cliff Stearns (R., Fla.) 00 want to know if Google’s behavior “constitutes a violation” of a privacy settlement Google and the Federal Trade Commission signed last year. Breaches of the settlement could bring fines of as much as $16,000 per violation per day.

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Clearspring, the social-sharing company — in an effort to increase its business as a marketing analytics player — has acquired XGraph, a data science company.

Clearspring declined to provide the price it paid for XGraph, but said the deal was in cash and stock. The start-up raised $3.75 million just over a year ago.

The combined company has 85 employees — 70 at Clearspring and 15 at XGraph.

Execs at the the McLean, Va.-based company said the purchase will increase value to advertisers and publishers via audience targeting and data science. Clearspring is best known by consumers for its AddThis social-sharing tool, which provides a lot of detailed user data.

Clearspring raised $20 million in funding in May. At the time, the company said it planned to spend its new cash on acquisitions that leveraged data and built audiences more efficiently.

The New York-based XGraph focuses on modeling and monetizing the Web’s social graph.

“We get a lot of data points every day and making sense of them is something we have already been doing, but XGraph fits the bill to go even further in the multi-graph use of data,” said Clearspring CEO Ramsey McGrory. “It puts us in a position to be the market leader for the application of data.”

Key Compton, CEO and co-founder of the three-year-old XGraph, noted that the industry has become data-driven in new ways.

“People are connected to each other via social connections in a multi-graph platform,” said Compton. “I think there are some really interesting opportunities to access the data.”

Here’s the official press release for the deal:

Clearspring Acquires XGraph to Create Largest Multi-Graph on the Open Web

Company accelerates growth by deepening data team and technology

McLean, VA and New York. NY. — November 1, 2011 – Clearspring, provider of the largest social sharing and analytics platform, AddThis, announced today it has acquired XGraph, Inc., a leading data science company focused on modeling and monetizing the web-wide social graph. Clearspring’s massive reach and proprietary real-time data processing capability, coupled with XGraph’s audience technology, create the largest multi-graph platform on the web — mapping 1.2 billion user’s connections by brand affiliation, intent and social behavior.

The investment in XGraph’s data science capabilities marks another step on Clearspring’s rapid growth trajectory. XGraph’s team has deep data science expertise with applied backgrounds in advertising, sociology, mathematics and computer science. Their unique technology dynamically organizes users by shared connections and interests. XGraph’s team and platform will drive Clearspring’s existing efforts with publishers, advertisers and agencies forward while also setting the stage for new innovation.

“Clearspring is at the epicenter of two major shifts online — the web becoming social and personal, and advertising becoming data-driven and accountable. The common thread in both changes is data. To compete in this new world, companies will not only need the ability to access and process big data, but also have the ability to activate that data to create value for consumers, publishers and advertisers,” said Ramsey McGrory, Clearspring’s new Chief Executive. “The combined company has the people, technology and data to enable our clients to stay at the forefront of these changes. 2012 will be a breakout year for Clearspring.”

For advertisers, agencies and trading desks, Clearspring will immediately be able to provide the largest multi-graph audience targeting capabilities available on the open web. By using this technology to identify a brand’s core audiences and finding millions of other connected and like-minded people online, the company can now drive more efficient spending and increased campaign performance. Clearspring also plans to leverage this new capability to deliver publishers unique audience insights, monetization capabilities and actionable data products in the coming year.

“Most companies only capture one dimension of how we’re all connected, whether it be our friends or people we share with — a single graph approach. XGraph not only models these social connections, but also multiple other types of connections such as brand affiliations, intent and more — a multi-graph approach,” said Key Compton, XGraph’s CEO. “We’re truly excited to leverage our technology to unlock the value of Clearspring’s massive data set and help publishers and advertisers truly harness the power of the web-wide interest graph.”

XGraph is headquartered in New York with an office in Silicon Valley. All XGraph employees based in New York will join Clearspring’s office there. Clearspring plans to keep the office in Silicon Valley. The combined company will have 85 employees nationwide.

Eric Rosenblum, Google’s director of product management for Google Offers, said the deals business is all about getting relevant offers. “In order to do that, you need a lot of good deals. Even if you have one good one every day, it won’t satisfy everyone,” he said.

Google Offers launched its first city in June, having to start from scratch after Groupon rejected its $6 billion buyout offer. Today, it is already in 17 U.S. markets, including four launched this week.

In those markets, the goal to date has been to offer one deal a day, sold by its own sales force. Now, through partnerships, it will be able to offer consumers more than a dozen deals daily.

The participating deal providers: Dealfind, DoodleDeals, HomeRun, Juice in the City, PopSugar Shop, ReachDeals, Tippr, Kgbdeals, Gilt City, Active.com, GolfNow, Mamapedia, Zozi and Plum District.

The additional offers will first be offered in San Francisco, and will be rolled out more widely in the coming weeks.

Aggregation is not new; however, no one has cracked the code yet on personalization and targeting — not even Amazon. Men still are being offered Brazilian bikini waxes; women get pitched discounts to the barbershop.

Rosenblum believes that by having a wider selection of offers, and by asking people what their preferences are, Google Offers will be able to offer a more tailored experience.

When consumers sign up, a quiz asks them about the types of deals they want, and where they work, live and hang out. That information, which is optional to share, will be used to deliver multiple offers that match the shopper’s interests, all in one email.

In a blog post, Google says, “If you’re not the outdoorsy type and you don’t love spa treatments, then we won’t send you deals for zipline adventures or hot stone massages.”

“People do feel overwhelmed by information,” Rosenblum said. “They want to have the best deals for them and most relevant deals for them — it’s very user-centric.”

Google will also handle the payments and redemption process, so users don’t have to remember which provider they purchased a deal from. Some of the technology being used was acquired through its purchase of the DealMap. Rosenblum would not disclose the terms of the partnerships.

Despite its late entrance, Google has done fairly well so far. Over the past two weeks, the search provider has launched in eight cities. “Google is feeling quite bullish about this, and we are expanding quickly,” Rosenblum said. “We are now doubling down and picking our partners. Our deal density goes up by 10x in all of the cities.”

More recently, Groupon has been asking people for personal information so that it, too, can provide tailored offers. In some of its bigger markets, it’s typical for Groupon to have a handful of offers every day.

In a pop-up bubble on deals, Groupon sarcastically says, “This Time It’s Personal: To see exciting sequels to today’s deal, start adding your Deal Types and Places near you!”

The Groupon pop-up inquires about how far the deal is from the shopper’s home, and asks the user to answer a simple question. On an offer for auto detailing, it asks, “Want deals like this one? If so, click that you love that new-car smell.”

I like you. Actually, I think you’re pretty great. We’ve known each other for a long time, and I really appreciate that you understand me so well by now.

You know, for instance, that I’ve thought about buying the newish Beastie Boys album. And that I was recently in the market for a new router. And you told me about this cool Madison Smartt Bell book I didn’t know about (I bought that one — sent it straight into the Kindle).

So I’m always happy to hear from you.

But lately you’ve been acting … weird. Like you don’t really know me anymore.

You’ve started sending me these notes about something called “AmazonLocal.” Apparently, they are daily deals that LivingSocial buys, then hands off to you to distribute. Because I’m not the only person you know well — you know lots and lots of people.

That’s cool. But these “AmazonLocal” thingies — they’re not for me.

You’ve sent me five so far. One of them was for a restaurant, which is fine, I guess. But I have a long list of restaurants I want to go to before I start going to random ones I’ve never heard of.

The other ones, though? I think maybe you thought they were going to somebody else. There was one for something called a “Brazilian Blowout.” And one for Pilates classes. And one for sewing classes. And today I got one for two “Brazilian Honey Waxes,” which I think do something different than a Brazilian Blowout. But I’m not sure.

And look. I’m secure in my manhood, and I’m not offended. And it will be easy for me to unsubscribe to these things, and I’ll do that just as soon as I’m done typing this.

I guess I’m just not sure why you sent me these in the first place. Why go ahead and make me feel just a tiny bit less good about our relationship? You certainly don’t need the money — you see $9 billion of that every three months. And if you did want to send me this stuff, all you’d have to do is ask.

But you didn’t.

And while I’m certainly going to keep buying lots and lots and lots of stuff from you, I might think twice before I open another one of your emails. What a bummer.

P.S.: If you do have leads on affordable three-bedroom apartments with outdoor space in a leafy block in Brooklyn, please holler, ASAP.

—-

Unrelated: One of my all-time favorite advertising videos. May not be safe for work, but you should watch it anyway:

——–
Also unrelated: Happy Birthday, Ben!

The e-commerce giant has started what is effectively an ad network* where it buys Web advertising inventory and resells it to marketers at a premium. It can add a mark-up to its ads because it’s using the data it collects about its visitors and shoppers to target likely prospects.

Amazon has noodled with Web ads in the past, but has confined itself to selling space on Amazon.com and other sites it owns, like IMDB.com. This is the first time it has branched out into ads on third-party sites, and that could be a big deal: It could be a serious revenue stream for the company, and it could also raise a privacy fuss.

The company is moving into the third-party ad business with the help of Triggit, a San Francisco-based ad tech company; there’s a press release announcing the partnership at the end of this post. An Amazon rep declined to comment beyond the announcement.

Here’s how it works: Amazon uses the detailed data it collects on its customers and visitors to create pools of potential marketing targets. Amazon tells Triggit to hunt down particular Web surfers after they’ve left the site, using tracking “cookies;” once the start-up finds them it purchases ad inventory those users are looking at. Amazon uses that ad space to serve up an ad for the marketer it’s working with, and charges them for the impression.

This is another take on “retargeting,” where advertisers trail Web surfers from site to site, and which has become standard issue for Web advertising. Retargeting rankles some privacy advocates, since Web surfers usually aren’t aware that people are tracing their movements.

The targeting is theoretically anonymous, since the marketers aren’t technically tracking individual people but their Web browsers. But that distinction doesn’t mean much to many people.

And since Amazon’s working with much more information — it knows what you looked at on its site, what you bought, and all sorts of other personal information — I can see folks making a fuss about this move, too.

On the other hand, Amazon’s already using personal information to show you stuff you might like to buy on its own site, and via promotional e-mails (“customers who have purchased or rated music by Elvis Costello might like to know that Delivery Man is now available”). So it’s entirely possible most people will shrug this off, if they’re even aware of it.

And if it works, there’s a lot of opportunity for Jeff Bezos and company here. Not only does Amazon have an enormous data set to work with, it can pitch marketers on its ability to “close the loop” between online advertising and commerce — it can get an ad in front of a potential customer, and then show that the customer ended up buying the product on Amazon.

Amazon chooses Triggit’s Demand Side Platform (DSP) technology

San Francisco, Calif. – June 28, 2011 – Triggit today announced that it has been selected by Amazon.com to serve as a Demand Side Platform (DSP) for Amazon’s digital display advertising. Triggit will provide Amazon with its sophisticated real time bidding (RTB) software to enable Amazon to show the right ads to the right users across nine ad exchanges and more than four million websites.

“To be selected to provide technology to a company as technically advanced as Amazon is humbling and incredibly exciting,” said Zachery Coelius, Triggit’s CEO. “We are looking forward to working with the Amazon team to hopefully bring some of the amazing innovation they have brought to ecommerce to the world of advertising”.

Triggit has been at the forefront of recent innovation in the online advertising marketplace and has developed technology that enables companies such as Amazon to better communicate with their audiences with highly relevant and timely messages across the entire web. Over the past year Triggit has seen wide adoption of its technology across the Fortune 500 and now counts as customers a diverse group of companies such as Kodak, Mazda and Orbitz. That market traction also enabled Triggit’s revenues to grow by over 2000% in 2010.

*For AdExchanger readers: Yes, this isn’t technically an ad network. But for general readership, the phrase should work well enough.

Now a series of specialized companies are pitching products to simplify the landscape by helping marketers navigate the online-advertising world.

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Lawrence E. Strickling, an assistant secretary of commerce, is expected to call for the legislation at a hearing of the Senate Commerce Committee, said a person familiar with the matter.

This person said the administration will back a law that follows the outlines of a report issued by the Commerce Department in December. The administration wants any new rules to be enforceable and will look to expand the Federal Trade Commission’s authority, this person said.

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Microsoft’s decision to include the tool in Internet Explorer 9 means Google Inc. and Apple Inc. are the only big providers of browsers that haven’t yet declared their support for a do-no-track system in their products. In January, Mozilla Corp. said it would include a do-not-track feature in an upcoming version of its Firefox browser. Internet Explorer is the most widely used browser.

The moves by Microsoft and Mozilla reflect an unusually fast adoption of an idea—the do-not-track system—that was first officially proposed by the Federal Trade Commission only three months ago. It highlights the pressure the industry faces to provide people with a way to control how they are tracked and targeted online, as lawmakers and regulators threaten to rein in the practice.

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Apple’s iPad success and the imminent release of new application distribution platforms from Google and other software companies threaten another seismic shift for publishers that may have far greater impact on their business models than the growth of free media on the web. Devices like the iPad offer consumers a rich reading experience and offer publishers even more targeted advertising, but the revenue tradeoff as publishers navigate the path from print to this new world is lopsided–and not in a good way.

While we all enjoy browsing publications at newsstands, over 90 percent of the circulation of U.S. magazines is delivered directly to consumers through the mail. The data and cross-marketing opportunities that these direct customer relationships provide to publishers is the fundamental underpinning of their business model.

Data informs advertising in magazines and allows for better targeting. It provides for the sale of ancillary products like books, videos and special issues. It allows multi-title publishers to solicit new readers across their enterprise. Even competitors agree to exchange lists because it benefits the industry by building more magazine readers from a pool of customers who already enjoy receiving their publications through subscription rather than by single copy purchase.

Without direct access to customers, publisher revenue will decline sharply and the publications that we depend on for in-depth reporting, news and entertainment will risk a final digital Armageddon.

Should we care? Why can’t the publishing industry just leave the world of messy ink and rural route delivery? Can’t it pivot to a less costly distribution model where customer ownership isn’t as critical?

Unfortunately, even if we assume that publishers retain their customers, there are extraordinary business challenges in transforming today’s print consumers into exclusively digital readers. And publishers can’t afford to relinquish their direct connection to readers without a more attractive economic model than the digital publishing world presents today.

Here’s why:

1. The Advertising Model Won’t Pay.

   Magazines are a wonderful advertising medium. Among the top fifty publications ranked by advertising revenues, each copy of paid circulation generates a pass-along audience that averages seven readers. Those seven readers factor heavily into advertising rates, and provide a significant revenue multiple to be weighed against the editorial, marketing, printing and distribution costs of delivering a copy to the consumer.

   What happens to this audience with a digital magazine? If a publisher wishes to be paid for its distribution, it will likely set entitlement requirements that discourage free circulation of its products. Even with integration of social networking tools to enable article sharing, publishers won’t generate more than 1.5 or two readers per copy. So the advertising revenue per circulation unit will fall due to the fact that fewer people see the ads. Even to remain constant, advertising effectiveness per copy would have to increase over four times to make up for the audience decline from seven to 1.5 readers per copy.

   Of course, most publishers believe these new digital magazines will have wonderful consumer engagement qualities that will result in a higher value being placed on their advertising. They believe digital ads will be better targeted and more efficient than print at delivering the right message to the right reader. But will that value be four times the value of print today? Not likely.

   Some argue publishers must cast their lot with free content and endeavor to survive with an exclusively ad driven model. But we need to remember the lessons of the web for most publishers. Even with the powerful reach the web provides, The Economist, The New York Times, The Wall Street Journal, Sports Illustrated and Vanity Fair would fail without the significant vote their consumers make every month by making a direct payment to the publisher.

   So editors and consumer marketers will bear a larger burden in this new mobile reading world. They’ll need to increase the revenue from consumers. And one could argue that this is a good thing, redressing the imbalance of an industry that has been too highly leveraged on advertising. But for the consumer stream to become more valuable, one of two things must happen: either the demand for magazines must rise, or the cost of distribution must fall.

2. A 30 percent Cut to the Store Isn’t a Great Deal.

   Isn’t selling your magazine through an app store and receiving 70 percent of the revenues a great deal? After all, magazine subscription agents and newsstands don’t return anywhere near that amount to publishers. But this is argument misses an important point. In iTunes and the Android Marketplace, there’s virtually no merchandising of magazine products. A magazine app must swim to the top of several hundred thousand other applications. And even in the context of a dedicated magazine store, the publisher won’t control featuring. The value of the brand must pull the consumer through to the purchase. And brands are expensive to build and nurture. So the publisher will continue to bear a high marketing cost to ensure enough sales for a stable level of circulation, just as they do today in the offline world. These marketing costs would certainly erase any advantage that a 70 percent cut would provide over the conventional agent model, particularly if the publisher cannot capture information on the customer and determine an effective ROI against their marketing expenditures.

3. Margin Must Come Before Marginal Cost.

   What about the fact that there is virtually zero distribution cost? Well despite the problems of the U.S. Postal Service, the cost of printing and distribution represents a relatively low percentage of publisher expenses–somewhere on the order of 20 to 25 percent today. Of course there are significant creative and technical costs in publishing a beautiful new magazine in tablet form. Just adapting to the variety of screen sizes, screen resolutions and operating systems requires significant new investments. These costs, together with the aforementioned ad revenue decline, more than eclipse the savings from eliminating paper and postage.

So where will this margin come from if not from the consumer?

Tablets provide publishers a wonderful opportunity to rethink their products and add more value. But no manner of reinvention will be possible if they can’t mine their customer relationships to merchandise these new products. If the relationship between the magazine publisher and customer is broken, the industry will end up like music and book publishers–removed from customers, wedded to old habits and powerless as digital delivery inevitably overtakes and diminishes the value of their physical distribution.

Lastly, let’s consider the argument from a consumer’s perspective. Nearly one out of every two Americans subscribes to a magazine today. Many will purchase iPads and other tablets over the next year. When they do, Apple and others suggest that 150 million consumers ignore their existing relationships with publishers.

In this battle over ownership consumers are the losers. They will not be able to direct publishers as they wish, choose to get both a print and digital version of the magazine, or move to digital only delivery. They won’t be afforded the opportunity to get a better value by bundling their print and digital delivery together. They won’t be able to align their print and digital purchases so that expirations synchronize and billing is simplified. They won’t be able to move their experience to the device that suits them–irrespective of the platform–and read on phones, laptops, tablets or anywhere they like. Nothing in the transition will remove friction or frustration. Is this an experience we will be proud of?

There will be a transition from print to digital delivery that publishers and software providers must manage for consumers, and not solely for the advantage of their business interests. A print magazine is informative, beautiful, portable and easy to navigate. It’s also inexpensive. There will certainly be a long period when consumers will wish to try out new forms of reading on tablets but not give up their trusted print brands.

Businesses that make these transitions easy for consumers will flourish. Consider the long path to electronic billing for the banking industry, the Netflix shift from DVDs to video streaming, or even Apple’s introduction of Macs that run Windows software. In each case, the transition strategy provided for significant long-term advantage. And most would agree that there’s a significant long-term advantage for the software industry to make friends with 150 million magazine consumers.

Here’s how they do it:

1. Allow the customer to buy access to print, digital or bundle both together with one-click convenience.
2. Create simple APIs that connect the handful of major print fulfillment houses to application storefronts so existing print accounts can be harmonized with digital access.
3. Provide for critical customer data to flow to publishers so they can refine their products and find new ways to merchandise them to consumers.
4. Build opportunities for publishers to cross-merchandise products from within their applications and utilize one-click checkout.
5. Don’t thwart retailers like Amazon and Barnes and Noble who have existing relationships with publishers. They know how to merchandize magazines and will be a positive force for competitive pricing and product development.

With these measures I think very few publishers would object to the 30 percent cut these stores wish to collect or have any significant concerns about the stores retaining the direct billing relationship with their customers. In the end, publishers would build more unique magazine products, sell more related products and encourage their consumers to buy more devices.

Of course, without such cooperation publishers will always have a choice where to play. Tablets are not made of stone and publishers are not called upon by a higher power to work with distribution platforms that are fundamentally destructive to their consumer relationships and business interests.

John Squires is a former EVP of Time Inc., and founder of Next Issue Media

AOL CEO Tim Armstrong is the gift that keeps on giving–at least to Greg Coleman.

He’s the Chief Revenue Officer at the Huffington Post, for which the Internet giant just forked over $315 million to acquire.

Sources said Coleman, who has run advertising sales at the privately held news and opinion site since the fall of 2009, will get a multimillion dollar payday from the deal, even though he is not staying on after it closes, since AOL has its own top ad guy.

Except that this is the very same Greg Coleman who had been running ad sales for AOL for only two weeks when Armstrong took over from ousted CEO Randy Falco in February of 2009.

Coleman was gone from AOL by the end of April, replaced by Armstrong with current ad sales head Jeff Levick.

And for those three months of work Coleman got paid out his entire three-year AOL contract.

Not bad work if you can get it.

Actually, many credit Coleman’s energetic work at the Huffington Post for turbocharging its ad sales revenue to $31 million in 2010 and projected revenue upward of $60 million in 2011.

Coleman is an experienced online ad exec who was at Yahoo for seven years, responsible for all advertising revenue worldwide. He came to Yahoo from Reader’s Digest.

But Coleman ran into Yahoo’s management buzz saw after trouble hit the company in 2007. He was one of the first in a long line of execs to leave the troubled company, departing in one of its many controversial reorganizations.

But Yahoo’s ad business did grow strongly under him and former Yahoo ad exec Wenda Millard.

Before AOL, Coleman ran a Los Angeles-based start-up called NetSeer, which focused on ad targeting.

Memo to soon-to-be unemployed Greg: You’re definitely buying lunch next time I see you, and keep in mind that BoomTown is feeling partial to caviar.