Fast Chat: Ted Leonsis

Online ad pioneer talks AOL, Facebook, video

Before Ted Leonsis became master of the D.C. sports universe—his company Monumental Sports & Entertainment owns the Washington Capitals, Washington Wizards, Washington Mystics and the Verizon Center—he served as president at a then-little-known startup called America Online. Over the course of his 14-year tenure at AOL, he oversaw the first display ads and even headed after AOL acquired the ad network in 2004. Leonsis left AOL in 2006 but has kept involved in the ad tech space as an investor with Revolution Growth Fund and recently offered his thoughts on the digital media landscape over lunch.

Adweek: Being one of the pioneers of online advertising, how do you see the landscape now?
Well the first thing I’ll note is when I first got into the business, nobody at an ad agency was wired. We had to walk computers in to give demonstrations on what online was and what the Internet was. Now it’s gratifying to see that all of the senior execs at ad agencies and direct marketing companies are young, and they’ve grown up living their life on the Net. That’s been a big cultural change. We’ve seen this evolution from CPM display advertising, where we used to think there were 100,000 advertisers, to a CPC/Google search industry, where they created a long tail of 10 million advertisers, of which they invoice a couple of hundred thousand people and then the rest pay wiht their credit cards. That was a real big change.
Then we saw the CPA, the cost-per-acquisition, the, the birth of the third-party network that was going after direct marketing budgets as a low-cost media placement, one of service creating scale by using other people’s inventory. We’ve now been layering on top of that the new killer app on the Web, which is video. Video and social networking is the fastest growing part of the Internet. Email usage is going down; video consumption is going up. So we’re seeing video and television and cable being replicated on the Web. Your device, your iPad, is a portable TV more than it is a device that you use for email. And now I see on top of it the next great development. We’ve applied enough math and algorithmic marketing to budgets, to spending, and we’re going to start to find new ways to understand emotion. What compels people to act and think? That’s usually emotion, romance, affinity to a brand.
So we’ll see a lot of innovation around psychographic, around what makes people think and have an affinity towards a brand or a campaign or an advertiser, because that’s where value is created. In a world where the Web destroys value by making everything least common denominator, brands are going to become more important in this new world, and understanding profiling and psychographics will be the next big thing.

There’s always talk about this shift of brand dollars to online, and that’s usually tied to ads resonating emotionally. How far along the spectrum are we in that shift?
It’s still the last bastion where there are walls up between the new media and traditional media. Most of the brand advertising and advocacy advertising is still on television, still in print, where you need the real estate to be able to activate an emotion or deep thought. I think that with more profiling and psychographic information that’s available and now video being delivered in very clever and ubiquitous ways, you’ll see a tipping now where budgets will start to go where the usage is. We’ve certainly seen the search industry go from zero to $25-30 billion in a decade. That spending came from somewhere. We’ve certainly seen the online display business get to be $15-20 billion. That business came from someplace. But this video/television/long-form, that’s waiting to be unlocked, and I think we’ll see that with this commingling of video and social happening over the next four or five years.

Do you expect video to rival or overshadow search and display?
Yes. I think that video is vital for marketers, for consumers. We live in this YouTube generation. I’m a Baby Boomer. It’s amazing to watch a sporting event. My father grew up listening to baseball games on a transistor radio. I could never listen to a sporting event on the radio. I grew up watching sporting events on network television and cable. My son has Slingbox on his iPad [while] tweeting. So my father, me and my son, who all love sports, consume in three different ways. So as video becomes more relevant and delivered on all three screens with a layer of interactivity on top of it that can include my son in his interactivity, yeah video will become a killer app. But it’s also the best friend of agencies. They’re comfortable with it. They can do more creatively. They can do more long-form communications than a static display or a link that would lead to a website. And it’s an environment they feel comfortable in, it’s like television but with the interactive overlay on top of it.

As someone who was at AOL for the majority of its existence, what’s your take on the company today?
So I started all the AOL content businesses, and before I left in 2006, I started what was called the AOL audience business, which is what AOL is today: content out on the Web available for anyone. So I certainly support the strategy. I thought buying the Huffington Post was a bold move, and I think pushing into video is a natural place. The CPMs that they can command on video-serving is much higher than what they can get on [text]. So I think Tim [Armstrong] is doing a good job, and I wish the company well.

As an investor, what are the types of companies you’re looking at?
I look for companies that have multiple revenue streams, advertising and commerce. I look for companies that use the network effect to get big fast. I think that seeing the power of [AOL Instant Messenger], of Facebook, the marketplaces that develop naturally have lower cost-profiles than companies that need a lot of marketing. I also think that companies that can be in the audio, video and print. Bringing that together you have a much higher chance of success than just relying on one type of media.

What’s your take on Facebook’s outlook?
I think Facebook is undervalued. I think that Facebook has become a once-in-a-generation kind of brand. Usually brands are needed or loved; Facebook is both. It’s become a utility. But you love it, as most of the activities on it have a personal meaning to you, keeping in touch with friends and with family. So I think that their usage will just continue. There’s more than two billion people online around the world that are connected to the Web. They’ve got a billion of the two billion, but because they have the network effect, I think they could have 100 percent market share. I can’t imagine any young adult around the world not being connected on Facebook. It’s a utility, like running water. And it’s commensurate with the Internet itself. We used to think of Windows to be the default screen on personal computers. Facebook is the default screen now for the Web, but certainly for mobile devices. So I have nothing but great feelings, and I think Facebook is going to be the greatest company of our generation.

No concerns about the first-quarter ad numbers being down compared with the Q4 2011 growth rate?
The first inning hasn’t even ended. This tree can grow to heaven.