LA — Capital of Monetization

What defines LA? Some might say sports. Some might say sprawl. Others might say entertainment. But I think all those are offshoots of what LA is really good at: monetization.

In a previous article, I wrote about the history of the tech industry in my fair and lovely city, Los Angeles. Common wisdom says that LA is still struggling to find our stride. Some say we need our first huge exit to help us define what our competitive advantage is as a tech hub. Truth is, the answer doesn’t lie in the future, but in the past. If you look carefully, you’ll see the debate, “what does LA do best?” is already settled.

Go back through the history of Los Angeles and you’ll find that LA has revolutionized many industries. Disney completely changed the face of animation by developing new techniques and building a sustainable, globally recognizable character and brand. Much of the modern movie industry was built in Los Angeles. Apart from early developments in camera work and technology, most of what we consider to be essential to modern movies has been conceptualized and created here in LA.

What makes Hollywood great is not that they have fancier cameras or better studios. The real secret sauce is is the content, which is then transformed into a finished product. Content is created by writers, directors, and actors — “talent.” These people’s creative instincts came along with fascinating personalities and character traits.

So while Los Angeles’ “talent” constantly created content, the press ran continuous stories about their antics. Media coverage informed and fueled our fascination with the class of people who made all the movie madness possible. Suddenly, people cared about the content creators, especially the ones they could see weekly on the big screen. Suddenly, content creators, who, until this point had largely been regular people, became famous.

Well, once you are famous, you’re presented with an opportunity. And clearly, this was the town to make something of it. The whole mythos surrounding fame is manufactured by this town for the sole purpose of consumption by the rest of the world. That is incredible.

You might think I’m being disingenuous here, that I sound cynical, but that’s because writing doesn’t convey the tone of voice I’d be using if I were talking to you, face to face. I’m telling you that this is incredible. Los Angeles was able to make content, monetize it, and then monetize the monetization of that original content, thus fueling another untold number of related industries.

And to whom can we give credit to for this wonderful development? Agents and Managers.

They might not have the best reputation, but the only way you can become a successful agent or manager is by being ridiculously sharp. These people — whether they are lawyers, accountants, or just plain gutsy — all start the same way: ambitious, but unestablished. To advance, the best used their smarts and their savvy to build a successful career solely around monetizing someone else’s fame.

These people get a reputation for being two-faced and back stabbing. Many times it gets applied to the majority of Angelenos, but I’m honestly alright with that. The only way to get a reputation like that is by being really savvy. Fame is not a tangible asset or commodity, fame doesn’t physically exist! We’re talking about professionals who are monetizing nothing more than a perceived elevated status amongst our society. Roland Barthes would be so proud of agents and LA.

Good agents and managers are essentially capable of building something out of nothing and making more money than most. How are they successful? They understand timing, value, and opportunity and know how to play the game.

But it can easily go wrong. When things go according to plan, there’s nothing special to talk about. So let’s talk about two ways monetizing a celebrity’s fame can go wrong:

1. Agents can be too aggressive and devalue the brand. This can lead to a PR disaster, ruin their client’s reputation, or other bad outcomes.

2. Handlers can be too timid and leave an opening for competition to steal the spotlight. Tomorrow, the whole landscape could change, leading to their client’s irrelevancy. And just like that they’ve left money on the table.

The agent’s dilemma should remind you of the a startup founders’ dilemma. They both require striking a delicate balance. Stay within the sweet spot and the money keeps rolling in.

Why did I bring this all up? Because I feel, and have felt for quite some time, that some of Los Angeles’s strongest industries, music and film, are on the brink of disruption. We’re seeking a new definition. This new definition needs to make sense and play to our strengths. We cannot pit technology against entertainment, Hollywood vs. the rest of LA. We must define what this town, as a top tech city, can become with both parts working hand in hand.

The answer to our ‘identity’ problem is so obvious it’s hiding in plain sight. LA is the capital of monetization. And we’re skilled monetizers out of necessity. For the same reasons Hollywood agents and managers became skilled at squeezing profit out of unpredictable resources, LA tech companies will come to be known for their innovative ways of making money.

This isn’t something we need to learn, we’re already good at it.

Just look the history to see a special role played by LA tech companies. This was before “Silicon Beach,” before the hype, and before the accelerators.

Google has turned from a “me-too” startup search engine, into the biggest of the big, a powerhouse that keeps displacing incumbents in various industries, when it’s not creating entirely new industries of its own. The company continuously garners high praise, attracts the best talent, and either spins off innovations or acquires them. But first and foremost, they have a business to run. Businesses need to make profit to meet payroll and pay back their investors. Google wouldn’t be where they are today if they had not been able to monetize their search engine.

This is where LA comes in. The entire monetization of Google, excuse me for simplifying, is basically two products: Adwords and Adsense. Adwords allows you to buy traffic by targeting specific keywords. Adsense allows publishers to easily monetize their websites with a ‘smart’ contextual banner ad.

A little background: Before Adsense, banner ads were placed manually and inefficiently. Adsense as a system looks at banner placement and who determines who is looking at the ad. Via semantic analysis and a bidding system, Adsense determines which ad to place and where.

Before Adsense, display advertising was unsophisticated and ineffective. Bill Gross of Pasadena’s Idealabs, realized there was a mismatch of benefits for the existing stakeholders in these transactions. Ad networks preferred purchasing page-views over clicks, for simplicity on their part. To complicate things, advertisers wanted to pay out only when someone clicked on their ad. But webmasters had no interest in that, for reasons discussed below.

For quite some time, the advertisers and networks were able to ‘hold the line’ and avoid making changes to their flawed system.

Now let’s consider the stakeholders who are most critical to making the display advertising system work — content publishers. A majority of those websites which monetized using banners existed regardless of whether or not they sold ad space. They spent time creating content and had audiences.

The issue for content publishers who’d install banners on their site was their desire to get paid by some way other than measuring clicks. Getting paid based on clicks wasn’t in their best interest because if an advertiser produced an unappealing banner, obviously no one would click. Site owners wanted a way to get paid for ad impressions instead of clicks. Why do that? This way, advertisers now had the right incentive to produce compelling ads instead of junky banners. So content publishers wanted to be guaranteed to get paid money, even a little, for every time an ad impression was generated.

So Bill Gross decided to create a system that sells ad impressions based on a bidding system. Yet, when Gross began his incubated company, no one was interested. Everyone, especially ad networks, wanted to continue to sell views because it made their lives easier. Why is that? If a website owner places a banner but the website owner’s content isn’t good, the advertiser and owner of the banner can shrug off any blame for low click volumes. Similarly, if the content is good, the advertisers can pay their content people less, claiming it is the appealing ad that brings the clicks, not the content on the site.

Gross decided that an auction system would force the market to decide what to pay. And as Economics 101 tells us, an auction is the closest to a ‘perfect’ pricing system that exists. Thus, Gross created Goto.com (later renamed to Overture), a search engine that incorporated this auction system. It wasn’t the best search engine, but it gave advertisers access to users on an advertising basis that is per-click rather than per-view, a huge boon for advertisers who like to do things per-click.

But the real win wasn’t in the search engine he had created, it was in the shift from in business model from per-view towards per-click payouts. Overture found that their advertisers would readily pay for clicks at auction. Finding that no one else was selling clicks, Overture licensed their technology to others and found that they could monetize other people’s websites. Yahoo saw how insanely profitable this was, bought it, and Google was placed in a difficult position. Overture patented a lot of that technology immediately, and those patents became ridiculously valuable over time.

Google made a mistake by not purchasing Overture immediately. Eventually, Google developed their own version, Adwords was born, and a legal imbroglio with Yahoo ensued. Yes, I understand that Adwords and Overture use different algorithms, but the fact remains — the main innovation here was Bill Gross’s, in realizing that auctions can drive better outcomes in paid search than the status quo. Unsurprisingly, this monetization breakthrough happened down in LA.

Now let’s talk about display advertising, advertisements like banner ads that are placed on websites. This time around things, things were different. Google learned a valuable lesson from their failure to purchase Overture: that it is simpler and more cost effective on their end if the technology needed to monetize their business is acquired first, modified if necessary, and worked into their system afterwards. To solve their display ad problem, Google decided to simply buy what they needed.

They found Applied Semantics, a company founded by Gil Elbaz, to have the technology they needed to further monetize their search engine. Elbaz, like Gross, is also a graduate of CalTech, and developed the technology of semantic analysis to determine which ad to place and where. The next thing you know, Adsense was born from technology which Google originally purchased.

Here’s why this matters: Google created the best search engine in the world, but couldn’t find a way to monetize it until they came to LA bought or adapted the systems developed by two CalTech alums.

Now you’re saying, “Great Howard, LA has been historically good at monetizing. So what does that mean for today?”

I think there’s plenty of implications. Obviously, most tech startups in LA focus on early monetization out of necessity.

When companies pitch down here, the a big part of the pitch is centered on the route to monetization. I see it every week at StartEngine when new teams come to interview, and when our companies go to raise money. In Silicon Valley, that strategy is often looked down upon in favor of the Facebook and Twitter models — grow fast, get users, monetize later. In LA, we don’t yet have local investors willing to support a company with no clear path to monetization. It’s ok. I think this will lead to a lot of companies from LA being profitably sold to Valley companies. But I also think it will mean a lot of companies stay here and become successful in LA, which is good for our community

So instead of being forced into the ‘early monetization’ position out of necessity, we should double down and embrace what we do. We need to stake our claim, become the world’s pre-eminent monetizers. As I’ve explained above, this isn’t a stretch — we already do it well. We just need to do a better job of communicating our unique and valuable skill as a community.

As I mentioned before, LA pioneered email, a technology that changed the world. But you’ll notice with most technologies that end up transforming the world, the original inventors don’t get rich. That was true with email. This sad fact will not change, but I’m fine with that.

Knowing this truth, in LA we should continue doing what we do best — creating things that make money.

LA needs to build that reputation further. We need to make every city understand that we are better than anywhere else at finding new, different and interesting ways to monetize things. That should be LA’s niche, and hopefully with that niche, the right talent will flock to this town. The next revolutions, like bitcoins, might not come from here. But I can sure as hell assure you that Los Angeles will find a way to add our value to the equation.

How does this tie into current affairs? One easy way to accomplish our goal would be a name change. Not a “me too!” branding like Silicon Beach. My friend Michael Carney makes makes a strong case that LA Tech is a better branding than “Silicon Beach”. In his article, he suggested that we put forth alternate ideas and start a discussion. To that end I’d like to throw several potential names into the mix.

1. Santa Monetize
2. Mint-sel-Town
3. The City of Angel Investors
4. Makin’ BurBank
5. The City of E-Commerce

Which do you prefer? Tweet me @HowardMarks

In closing, I’d like to make one last statement.

The future of monetization might be constantly evolving, but I’m certain Los Angeles will be the startup community who does it most successfully. We’re primed for a monetization explosion.

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