Sunday, April 19, 2009

What Zango Got Wrong

When the six original Zango founders gathered at the Centralia McMenamins pub in July 1999, we really had no idea what we were getting into. None of us besides Keith had ever started a company before: all we knew is that everyone around us was starting one, and we had to be in on the goldrush. Our original idea – "pay people to surf the Internet" – was laughable in hindsight, but back in 1999, even the stupidest ideas made a certain kind of sense. And even in that silly idea there was the germ of something that still has the potential to make someone a lot of money.

The idea that still makes sense is something we called "time shifting", or in a slightly more verbose formulation, "online content sponsored by time-shifted contextual advertising". For background, start with this article from Business Insider about Google's YouTube division. Google is, of course, insanely profitable, largely on the basis of its AdWords and AdSense products: but it's losing nearly half a billion dollars annually (around $1.3MM each day) on YouTube. Google acquired YouTube for way too much money on the assumption that they could apply AdWords economics to an entertainment site. And of course, the economics simply don't apply. When I go to google.com, I want to be taken away from the site: that's the whole genius of it. So a well-targeted ad is, for all practical purposes, precisely what I'm looking for. But when I'm on YouTube (or Hulu, or any of the other video sites), I'm going there to be entertained: and the last thing I want is to click on an ad that at best distracts from the experience, and at worst interrupts it entirely. It doesn't matter how well you target the ads: they will always return dramatically lower CPM's than an ad on Google's home page.

Zango's answer to this problem really was genius: keep the content free, and sponsor it with ads, but don't display the ad to the user when they're consuming the content. Rather, show it to them later, when they're doing something which indicates they're potentially in mood to act on the advertisement. The CPM's tell the story: over the last several years, Zango's average CPM was somewhere around $25, which is phenomenal. And it would have been higher, indeed, much higher, if it weren't for several other factors that I'll go into shortly.

In other words, Zango's business proposition was more-or-less unique, and solved perhaps the most significant problem facing the current Web 2.0 generation of companies. So why did Zango ultimately fail? (Because yes, that's what the acquisition by blinkx represents, even if blinkx keeps the brand and systems going and retains some of the employees.) From the perspective of nearly a decade at Zango, and a little less than a year watching from the sidelines, I think that of the numerous contributing factors, the following five were most significant. Not everybody at Zango would agree as to which ones were most important, but pretty much everyone would agree that they all played a significant role.

  1. Zango screwed up its distribution. Back in 2003-2005, we partnered with some people that we should never have partnered with. We almost completely outsourced our distribution to them, and we let them promote and install our software without adequate oversight or supervision. During that time period, my best estimate is that something like 4% of our installs during that time period were completely silent, i.e., were the result of affiliates using browser security holes to install Zango's software with no knowledge or consent by the user. The bigger problem, however, is that the vast majority of our installs received inadequate consent, i.e., the user technically had an opportunity to decline the install, but wasn't presented with enough information to make an informed choice.

    We acknowledged this problem a long time ago, and well before the FTC ever came knocking on our door, we were working our asses off to fix it. And eventually we did. It's been years since the last inappropriate Zango install, and Zango's notification and consent is by any reasonable standard better than Yahoo's, better than Microsoft's, and better than Google's. But it was too late: the damage had been done. Zango's reputation was never able to recover. And having a bad reputation as an Internet company is somewhat worse than having a bad reputation in high school. Instead of not getting invited to the cool parties, you find yourself unable to close deals with strategic partners, which is a lot worse.

  2. The desktop advertising industry screwed up even worse, and took Zango down with it. It's significant that of all the major desktop advertising players (the others being Claria, WhenU and DirectRevenue), Zango was the last one standing. Partly this is because we made some strategic product and acquisition decisions the others didn't, partly it's because our major sins were sins of omission rather than commission. But in the end, it wasn't enough. Back in 2003, spyware meant "a program that your wife puts on your computer to track what you're doing." By 2005, it was synonymous with "adware", which was an awkward if reasonable description of Zango's business model. How did this happen?

    Well, folks like DirectRevenue, IST, MindSet, and others of that ilk didn't just miss that bad installs were happening: over the years we saw plenty of evidence that they actively encouraged it. And when they found a security hole, they would typically install dozens of different pay-per-install applications. And very few of those programs had any sort of notice, QA, or presence in Add/Remove Programs: in contrast, Zango had all of those things. So all the user noticed was that their machine had suddenly slowed to a crawl, and they find this "Zango" program on their PC. It wasn't Zango that was slowing their machine down, but how could they know that?

    Keith dubbed this the "tallest midget" problem: we were the tallest midget, so we were the ones that got noticed. I remember one incident very well: an AIM worm making the rounds was installing both Zango and WhenU (among others). When the worm attempted to deliver its payload, Zango automatically popped up a notification to make sure the user was appropriately informed, and to give them the opportunity to cancel it if necessary; WhenU, in contrast, installed silently. But precisely because Zango was trying to do the right thing, all the news articles mentioned Zango, and precisely none of them mentioned WhenU. That was very frustrating.

    The result is that a cottage industry (and eventually a mansion industry) grew up around adware/spyware removal. Sometimes those programs were well-designed and helpful, sometimes they were worse than the spyware they proposed to remove. But either way, it meant that the average lifespan for a desktop advertising install decreased dramatically. Over the years, we negotiated extensively with these companies to understand and address their concerns, and some of them were willing to work with us, but many simply refused to talk to us. After all, they were in it to make a buck as well: and from their perspective, nothing good could happen from not aggressively removing us.

    Even more damaging, many advertisers began to institute "no popup" or "no adware" policies. Almost none of our largest advertisers in 2005 were with us by the end of 2006. The few content partners who would talk to us were extremely skittish. Google, Microsoft, Yahoo and AOL all refused to give us their search feeds, nor would they permit us to advertise Zango on their properties or through their networks. It's frankly impressive that Zango was able to stay in business as long as it did, when we couldn't even do business with the majority of the Internet.

  3. We failed to deliver adequate value in exchange for the advertisements. Let's face it: it's a fairly aggressive tactic to pop an ad unexpectedly over somebody's browser session, no matter how targeted. If you're going to get away with it, you need to offer a pretty good value proposition in return. With a few exceptions, Zango was never able to do so. Zango has hundreds of thousands of pieces of content in its content catalog, but users generally conclude (and fairly quickly) that the tradeoff isn't worth it. As one Zango manager put it, "We're trying to sell people a Yugo for a Mercedes Benz price."

    There were many reasons Zango wasn't able to fix this. A major one is that the folks who owned the compelling content, and could have benefitted from our monetization, didn't want to work with us (see points #1 and #2). But probably the biggest is that we were brain-dead, and didn't recognize this problem until too late. We focused on optimizing our sales workflow, our ad targeting mechanism, our BI systems, and our installation process: but we spent precious little time improving our content. This was an institutional and cultural problem at Zango for far too long. Periodically, someone would come along and talk as if the consumer experience mattered, but it rarely got beyond words and speeches until late 2007. (To Keith's credit, he did ultimately declare this emergency, and the result was Platrium, which does a much better job of balancing the cost-benefit equation: but it was too little, too late.)

    On a side note, this is also the problem that I personally take most responsibility for. As the CTO, I was ultimately responsible for the product that we delivered. If I knew then what I realize now, I would have made dramatically different product choices, would have fought a very different set of internal battles, and most importantly, would have brought somebody like Val Sanford on board much, much sooner.

  4. Zango was unfairly charged with affiliate commission stealing. This is a complicated story, and I'll forgive anyone who doesn't want to read through the gory details. Back in 2004-2005, Commission Junction and LinkShare were two of Zango's largest advertisers, and we were one of their largest publishers. We displayed targeted ads promoting their advertisers' products, took a share of the proceeds when a user bought something, and pretty much everybody was happy. Initially, we sometimes used the advertiser's home page as a targeting mechanism, and I'll have to confess, this never struck me as particularly fair to the advertiser. (If the user is already sitting on eBay's site, why should we get a commission if the user happens to make their purchase through our ad rather than their original browser instance?) There are some instances when home page targeting is justified: if Alaska doesn't want Southwest's ad to show up when someone visits their website, they should pay for the privilege. (You'll note whose ad shows up when you google "Dell", and that doesn't happen for free.) But most of the time, I think the advertisers who complained about it had a reasonable point. However, as soon as LinkShare and CJ asked us to stop this practice, we did so. We even implemented a number of fairly complicated and expensive features to ensure that we wouldn't inadvertently display ads that would violate their terms of service. (In fact, Ben Edelman once badly misinterpreted a packet sniff to imply that we were being particularly nefarious, when what it actually showed was us trying desperately not to step on somebody's home page, and going through some admittedly strange gyrations to refrain from doing so.)

    But here's the frustrating part. Imagine the following scenario. A user with Zango's software visits a CJ publisher who is promoting some eBay products. That publisher sets a cookie on the user's machine that says, in effect, "If this user buys something from eBay, I get the commission." But then, before the user visits the eBay site, but after the first cookie was set, Zango happens to pop an ad that sets a different cookie, this one claiming the eBay commission for Zango. Given this scenario, I'm perfectly willing to grant that Zango should not get the commission, and the original publisher should.

    So the question is: how do you make sure that the first publisher gets it, and Zango doesn't? For a variety of reasons, this was a difficult scenario to prevent from Zango's side. (Among other things, how are we to know that the site in question belongs to a CJ affiliate?) This is a very simple problem to prevent, however, if you are Commission Junction or LinkShare. Your script should just place different cookies for each publisher, and you should give the commission to the owner of the cookie with the earliest timestamp rather than the latest. But for reasons that I don't understand, neither CJ nor LinkShare would agree to make this simple change: and eventually, under pressure from their other publishers, they stopped doing business with us altogether, to nobody's benefit.

    I should note that this is made a little more complicated by the fact that some of the folks who advertised through Zango did in fact engage in nefarious cookie stuffing and commission stealing. The way that Zango's advertising system worked, an advertiser could make the link they insert do pretty much anything allowed by the browser sandbox. And some of our advertisers did engage in commission stealing. It was never possible to catch every instance of this, but we did our darned best, and implemented a number of processes, systems and features to catch folks who were trying to do so. In the end, the extent of such third-party advertiser fraud was minimal.

    There's been a lot written about Zango "cookie stuffing", but I should say very clearly: Zango does not stuff cookies, has no interest in stealing somebody else's commission, and did everything it could to prevent this from happening. Yes, Zango did display targeted ads, and would have liked to display ads from affiliate networks: but those ads introduced an ambiguity into the process which the affiliate networks refused to resolve. The net result was that Zango was shut out from what once had been, and should have remained, a mutually beneficial and profitable advertising channel.

  5. Zango financed its acquisitions with too much debt, and not enough equity. If you ask Keith what went wrong, this is what he'll tell you. And while I don't believe it's the whole answer, he's got a point. Zango was trying to fight a four-front war, keeping advertisers, publishers, content providers and users all happy simultaneously. To do this requires a certain economy of scale. And those economies of scale required a significant investment in user acquisition to maintain an adequate audience. Unfortunately, because we financed our acquisitions primarily with debt rather than equity, we had to spend almost all our spare cash on servicing the debt, and were unable to adequately finance our publisher channels and direct-to-consumer advertising. Due to this lack of investment, Zango's audience continued to shrink, which meant that we had more difficulty servicing the debt, which meant that we had even less to spend on user acquisition. You see where I'm going with this. If we had been willing to dilute ourselves more, we would have had smaller debt payments to make, which would have allowed us to continue investing in our audience. It's all very simple once you point it out.

If I get a chance and feel like it, I'll post another set of thoughts on what Zango did right: because while we ultimately weren't successful, we made a hell of a good run at it, and did a lot of impressive stuff along the way.

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