Jay Bhatti

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Jay Bhatti was recently in ABC News – Check out the video here

http://abcnews.go.com/Video/playerIndex?id=7692979

Jay Bhatti was quoted by the E-Commerce Times about his thoughts on the Yahoo quarterly earnings call.

http://www.ecommercetimes.com/story/Yahoo-Wilts-in-Q1-Bartzs-Honeymoon-Nears-End-66877.html

For most of the past 10 years, online advertising has been dictated by the publisher or ad network (the website that is displaying the ad). Advertisers were willing to pay significant money and while receiving little in return with regards to performance, conversions, or measurable results. The Internet was the wild west of 21st century advertising, and no advertiser wanted to be left out.

In the late 1990’s, publishers charged on a CPM (cost per 1000 impressions) basis for display ads (the “punch the monkey” type banner ads). It did not matter if the user clicked on an ad or even looked at the ad, as long as the publisher loaded the banner on their webpage, you were charged. Initially display ads were the main revenue stream for companies like Yahoo, as advertisers ended up paying $20 CPMs for “brand awareness.” On average CPM display ads have a click trough rate of less than .20%, which comes out to an average of $20 for a total of 2 clicks. In addition to a low click through rate, an advertiser would have to face the reality of an even lower probability of a sale once someone landed on their site. Display ads charged on a CPM basis were thus considered “brand” spend. For marketing managers the idea of “Brand Awareness” would likely end up being their main motive and justification for spending so much for such little user engagement.

Google changed standard online advertising when they came out with CPC (Cost per click) text ads. Though Overture was technically the first to charge for ad performance, Google is attributed with mass implementation of charging only if someone actually clicked on something. Advertisers were then able to measure their cost and return on an investment more accurately. An entire industry popped up overnight, each claiming to better manage and convert clicks to sales. Since Google made an emphasis on preventing click fraud (even today, 30% of all ad clicks are the result of click fraud), they became the only reliable place for advertisers to spend their money and be able to actually turn a profit.

From 2005 to September of 2008, the online ad industry grew exponentially. It seemed as though a new ad network was popping up every day as brand advertisers were willing to pay an arm and a leg for display ads on quality sites. Similar to CPM ads, even if a CPC ad never resulted in a sale, the idea of branding still appealed to advertisers. Since their ads were actually measurable and generating sales for advertisers, Google grew faster than their competitors. Even with Google’s growth, smaller ad companies found success.

However, the ad industry took a major hit this past September. When the financial meltdown happened, many display advertisers like Ford and Tiffany’s decided to cut their display ad spend. It did not make sense for advertisers to spend on branding for something where results could not be easily calculated. Within 15 days of the crisis, CPM display ad spending dropped by 20% across the web. In relying heavily on display ad revenue, the meltdown was a major reason why Yahoo had such a disappointing quarter.

Most people thought that Google would not have the same issues as other companies since they do focus on CPC opposed to CPM. Yet data is starting to show that even they are feeling the impact of the economy.

What made Google initially attractive was its ability to generate a high sales rate. If I sell a product for $10, and it costs me 10 cents for every click that Google sends, then I only need to have a 1% conversion rate in order to break even. This model has allowed thousands of advertisers to spend billions of dollars on Google and feel confident that they can turn a profit or at the very least break even.

However, with consumer online spending taking a significant dive, people are less likely than ever to spend online. Thus, while Google is still charging me 10 cents per click, the users who do come are much less likely to use their credit card. If all of a sudden I’m losing money on Google ads, then I’d naturally cut my ad spend, something many advertisers have already done. With advertisers dropping out, Google has in turn lowered its bid price on keywords for remaining advertisers.

So, if Yahoo and Google are both dependent on the economy at large and are feeling the pinch, is there an online advertising model that is recession proof? The answer is yes!

One area that has remained strong in online spend is performance based advertising. Commonly known as CPA (Cost per Action). In CPA ads, an advertiser only pays if someone comes from a publisher and actually purchases a product or performs some other function on your site. Netflix is a company that almost exclusively uses CPA campaigns. Offering a fee to an ad network for every lead generated, Netflix makes a profit on nearly every signup. With a guaranteed profit, Netflix can use an unlimited ad spend. Thus, with a CPA model, everyone wins. For a CPA Network, they in turn are able to make a decent profit by allocating funds to publishers that generate a leads. The CPA approach is the only advertising model on the web that is not subject to click or page impression fraud and gives the potential for high payouts for everyone involved. With fewer concerns as to legitimacy of a lead, it’s no surprise that ad dollars are being taken out of CPM and CPC ad networks (like Yahoo and Google) and going to CPA Networks.

Going forward I see the future of online advertising favoring a performance based model. In order to not be left behind, key players such as Google and Microsoft have already taken the appropriate steps for this transition. Google recently launched a service called the Google Affiliate Network, their version of a CPA Ad Network, while Microsoft has made a big push to get advertisers like eTrade onto their platform by promoting a CPA model. It’s very likely that Yahoo will follow suit.

That’s not to say that all advertising will switch to CPA. While I expect to see CPM ad spend continue to fall, there’s still a place for CPC or a combination of CPC/CPA model advertising. At Spock, we realized CPM display ads were not right for us. Switching to a combination of CPC text ads and CPA campaigns for signups, we were able to successfully direct better targeted traffic.

On the publishing side, being a search engine, our utilization of CPC and CPA enables us to make direct deals with advertisers to either pay per click, or pay based on their own sales. This has made getting advertisers on Spock significantly easier. Similar to the early days of Google, by offering a targeted search experience to users, advertisers can feel confident that they can once again at the very least break even. In most cases, since a user is already looking for people, Spock can target accordingly. Thus even with less traffic than other sites, the ads on Spock will actually outperform ads on places like Yahoo or Microsoft. While Spock may be unique as a search engine, other sites such as blogs or shopping sites could easily emulate a similar formula.

Even with a slumping economy, online ad sales still has a bright future. While it won’t quite be the same as the early days of few sites and thousands of advertisers, there should end up being a better balance between advertisers and publishers. What this means is that advertisers will not only have more choice on where to advertise, but also more choices on specialization. Though this will inevitably lead to missed opportunities, much like any other type of advertising medium, results will ultimately decide who and what succeeds.

I know a thing or two about consultants. I used to be one for nearly 5 years in the fast paced world of high tech consulting on Wall Street. We would advise banks on everything from what database to buy, to how best to setup global technology infrastructure and headcount.

When I heard that Yahoo hired Bain to help them figure out what to do with their organization, I started having some reservations about such an approach.

It’s not that I feel hiring consultants is a bad thing. On the contrary, if you need a specific technology implemented and don’t have in-house expertise, or if you need some detailed market research, then a consulting firm is by far the best option since they work with various companies in your industry. But, if you hire consultants for corporate strategy, then you are asking for potential problems.

Hiring consultants can represent an unnecessary waste of resources. As a VP or C level executive, you should already know more about your business than some hired hands that comes in for 6 weeks to propose a “transformational” roadmap on how to reshape your company. In addition, often times a company already has a sense of what needs to be done, and will look to consultants merely for justification or validation for their actions.

After I left the world of consulting and joined the tech industry, I was surprised to see how many times senior executives would hire consultants, wasting hundreds of thousands of dollars on a consultant’s recommendation, that in the end was no different than what the executive wanted in the first place. Not that an executive is likely to complain about the cost. More often than not, transformational consultants are brought in as an executive scapegoat to blame for the layoffs or change.

Yahoo, in hiring a consulting firm for its corporate strategy will likely face warranted and unwarranted criticism from both sides.

One of the reasons why Yahoo might have made its decision public was to show the market and their employees that they were being as careful and diligent as possible in determining what cuts needed to be made. In hiring a top company like Bain, they undoubtedly hope the marketplace will view their hiring as an indicator of their desire to get the best possible advice and implement the best plan.

Yet, in my conversations around Silicon Valley, there’s a vastly different vibe in response to the news on Yahoo. There’s a strong sentiment among insiders that Yahoo hired Bain because they do not have the operational leadership in place at the top and management is disconnected from the workings of the organization. In addition, Yahoo management wants to disconnect themselves from certain hard decisions and having a consultant is the easiest way to save face.

One person I spoke with cited the management principles of Jack Welch, who has no patience for any of his executives that would choose to bring in management consultants. Jack firmly believed that if you have to bring in an outsider to tell you how to run your business, then maybe you belong someplace else. One of the people I spoke with even went as far to say that Yahoo’s decision to hire Bain only proves that Jerry Yang is not the right person to run Yahoo.

I feel as though the comments on Jerry are a little harsh as I’m personally a big fan of Jerry Yang and what he’s done. I respected his stance during the Microsoft bid, and being an entrepreneur in Silicon Valley myself, I know how hard it is to create a valuable company, hire great people, and navigate through the rough times that come in the tech sector every few years. After listening to people complains about Jerry Yang, I often ask them how many multi-billion dollar companies they’ve started?! Jerry created one of the darlings of the Internet and the most visited site in the world, yet he’s still getting blasted for every move he makes or does not make. While I certainly don’t agree with everything Yang’s done at Yahoo, I have a tremendous amount of respect for the decisions he’s made and the challenges he faces today.

Unfortunately for Yahoo, there is really no right way of doing what has to be done. Had they not hired Bain and the layoffs include the wrong groups, then people will blame them for not thinking through the process. However, even if Yahoo gets the ideal outcome and strategy in the long-term, it will still be perceived by some people, that the management was weak for having to go outside for something that could and should be done by senior leadership directly.

Ultimately, Yang will need to disregard the short-term noise people in the valley and Wall Street make. He’ll need to make the final call on what strategy to implement, and regardless of where that plan comes from, if it is the right one for Yahoo, I am sure Yang will pick it.

With the financial meltdown yet to be resolved, a slowing economy and VCs backing away from Web 2.0 start-ups, many people assume that now is the worst time to launch a start-up. Yet, now is precisely the best time to launch a tech start-up. Historically some of the most successful companies have started during times of financial uncertainty. Given that IBM, Microsoft, Oracle, and Google were all started during economic downturn, we may see the next big thing emerge.

To begin a start-up the right way in today’s environment, one should go by the following three principles which have become standard issue in Silicon Valley:

1. Focus on Your Business Model and Technology – Investors and entrepreneurs are realizing that a big user base start-up such as a social network or a community powered media site is not necessarily the path to success. Social sites can be hard to monetize, and most social sites do not require the creation of any defensible IP. With no defensible IP or sustainable business model, many recent social and media start-ups are finding it harder to stay afloat.

If you were to begin a start-up today, make sure to start with a strong business model and comprehensive technology. Google is a great example of this. Early on in their development, they made focusing on their technology and business model a priority. With the tech boom busting in 2000, Sergey Brin and Larry Page knew it would be hard to survive without being self-sufficient. In the past, other search engines had made their business model secondary. Having deep pocketed VC’s backing them; it was assumed they’d have ample funding forever.

At Spock.com, we’ve focused on our technology since day one, and have emphasized our business model even more so over the past several months. I cannot tell you how much we have learned about our business and market potential after we focused equally on our technology and business model. I would recommend to every aspiring high-tech entrepreneur to make it a priority to concentrate on building companies with a strong business model and technology. Not only will you be able to survive the lean times, but you will also create something of value that other companies will pay serious money for when it comes time to think about an exit strategy.

Many newly formed start-ups in the Valley are beginning to see the value in this principle. Billshrink.com, a cell phone and credit card comparison site, is an example of a start-up that emphasizes their business model and has a strong focus on building a unique technology to solve a common problem.

2. Hire Great People – There are a lot of great engineers and business types in the marketplace today. During lean times, it is easier to hire great talent because there are not as many start-ups to compete with. If you have a compelling start-up during a downturn, you’ll be able to attract the cream of the crop. This was one of the primary reasons that Google was able to hire a great set of engineers in 2000 after the bubble burst. Since many saw it as one of the few start-ups left that had a chance to succeed, its openings were highly pursued. With such a deep and talented pool to pick from, Google ensured that its new hires met their criteria of engineering horsepower and team culture. In 2006, with Silicon Valley full of new start-ups, it was difficult for Spock to easily hire the top talent. Yet, we made sure to only hire the people who met our unique needs, from experienced engineers to young and motivated talent. To run our search, we picked up Hongche Lui, a seasoned expert in information mining from Yahoo. Our next great hire was Wayne Kao, a young and talented engineer from Microsoft, to run our front end. Both Hongche and Wayne are responsible for the development of Spock and its progress to date. If we had hired the wrong people in the beginning, we may have never gotten off the ground. I cannot stress enough how important hiring the right people is to any start-up. Spend the time necessary to find the right people for your business and never compromise.

3. Create a Prototype First – The days of taking a PowerPoint to a VC and getting a term sheet are extinct. Investors want to see that you can actually build a product and have market feedback. It’s in your best interest to get as far as you can without investors. You’ll be forced to focus on building a quality product and being scrappy. Startups such as GoPlanit.com are examples of companies bypassing initial VC funding while they prove their model works. Ultimately, if your product receives a positive response from the market, you’ll be in a much stronger negotiating position for more favorable term sheets with VCs. From a financial and sustainability perspective I think this is the best approach.

While doing any start-up or business is a daunting task, the better job you do in fine tuning your business model, hiring the right people, and creating the right product upfront, the greater your chances of outlasting the competition and achieving success.

A lot of people in Silicon Valley have been talking about former Hewlett-Packard CEO Carly Fiorina’s recent comments that neither of the presidential candidates or their running mates could run a major corporation.

Many criticize her comments as being elitist and perpetuating the belief that, business executives have a halo around their heads and can do anything from running a company to a country. Given that her HP employees toasted champagne glasses when she was fired, it is fair to say many at HP, including the board of directors, thought Fiorina was not qualified to run a major corporation either.

The fact that Fiorina replaced the pictures of HP founders with pictures of herself is just one example of how she may want to take a look in the mirror before critiquing others’ leadership. If her actions at HP were any indication, one could only imagine what her first move as president would be—replacing the Lincoln Memorial with a statue of herself?

Numerous politicians (whether you like them or not) have made successful CEO’s after careers in politics. After a long career in public service, Dick Cheney took over a Fortune 500 company in Halliburton and was extremely successful. Donald Rumsfeld, after spending his entire life in politics, took over as CEO of G.D. Searle & Company– a global pharmaceutical company. During his time as CEO, Rumsfeld led the company’s turnaround and was named as the Outstanding Chief Executive Officer in the Pharmaceutical Industry from the Wall Street Transcript (1980) and Financial World (1981). Even Al Gore has done a decent job of transforming himself from a career politician to a business executive, acting on the board of Apple, as an advisor to Google, and as founder of Current TV.

That is not to say that every politician would make a good CEO, but leadership and having technical operating experience in an industry are two different things. Fiorina is correct to argue that none of the candidates have the technical operating management experience necessary to understand the computer industry, but is wrong to imply that these candidates do not have the leadership traits necessary to run a corporation. Still, her criticism does make one wonder about the transfer of leadership from one occupation to the next.

As governor of Alaska, Sarah Palin—perhaps the most criticized of the candidates—is responsible for the state budget, the board of education, the National Guard, the state police, the taxing of its citizens, the appointment of judges, and a number of other responsibilities. In addition, Palin has to be knowledgeable about issues such as drilling in Alaska and its impact on the environment. Yet, Fiorina thinks Sarah Palin is not fit to decide what model laptop to release next Christmas.

Leadership is the ability to find the right people and then motivate, organize, and direct them to the accomplishment of a common objective. While having operating experience in an industry is a major plus, without strong leadership skills, no amount of experience matters.

For example, if either John McCain or Barack Obama were to run Spock.com, each would bring a distinctive style of leadership. With Spock’s objective to create the best people search on the Web, it’s safe assume that neither Obama nor McCain would be familiar with the challenges and technology surrounding people search. However, there are other areas in which they each would excel.

If Obama ran Spock, I am sure he would do a great job of fundraising for the company and getting the message out to millions of people about how Spock is attempting to bring about change in the way people can locate each other and find information. Similar to his choice of an internationally experienced VP—Joe Biden—Obama would most likely hire a competent COO to help direct the company and to aid in understanding the inner workings of a search engine.

McCain, on the other hand, could be just as successful. With a maverick style of leadership and his “us against everyone else” attitude, McCain would appeal to many investors and employees. Should something go wrong, such as a server going down, I could picture him sticking around the office overnight until the site was back up and running (as Meg Whitman did with Ebay a while back). Additionally, McCain would do a good job of seeking to partner with other companies.

While they may not agree on the same issues or lead in the same way, it’s fair to say that both Obama and McCain would bring a unique quality of desirable leadership, whether to the presidency, a corporation or a start-up.