Q&A: Piper Jaffray’s Rashtchy

NEW YORK In a recent report on the state of the online media world, Piper Jaffray predicted a “user revolution” is under way as consumers take more control of their media choices and purchase decisions.

Thanks to the Internet becoming mainstream, with Google’s search supremacy at the center, the investment bank expects global online advertising revenue to surpass $81 billion by 2011, a 21 percent compound annual growth rate.

Piper Jaffray’s lead Internet analyst Safa Rashtchy explains why the Web is changing the media world, how the lines between communications and media are blurring and why Google is the most important company.

What do you see as the main drivers of the “user revolution”?
People have become well aware of how to basically conduct themselves [online] and how to get entertainment and how to get content. Two singular events that accelerated this is the introduction of PC and then the Internet. So, these things didn’t cause them, but they certainly accelerated the whole trend of people becoming a lot more self-confident and aware. We are dealing with a totally different consumer today then we were dealing with in 1945 and 1950.

You identified a major trend as something you call “communitainment.” Explain what you mean by that term.
I was wondering why people, especially young people, spent so much time on MySpace or IMing. Are they cutting back on something else? Well it turns out that they are cutting back from something else, of course. The communication on IM and MySpace is entertainment for them. To them, communication is not what it is to us. If we’re talking, we want to exchange some information, then we’ll get back to our work, or we’ll go watch a movie for entertainment on TV. For younger people those [communication and entertainment] activities are intertwined. They send music and video files to each other, and that activity, by itself, is fun for them. It is not the same as what we call communication. I think increasingly, people on the Web, especially younger people, are going to gravitate toward content consumption in a way that is not direct content consumption but, combined with something else that is tied within community.

It’s pretty apparent you think Google is the most important company in the sphere. Why?
Google is the first major company with a significant platform that’s basically put users right in the middle to control everything. Everything they design is for users. For all other companies, from Microsoft to Yahoo to News Corp., their operation is [focused] around their business model. Google actually designed a system that really helped users, put them in the center, and allowed them to get what they want faster and easier than anyone else. And they continue that today.

How do they end up translating that into new areas? Obviously, Google can go in any number of directions.
You have to realize that Google’s technology allowed people to find whatever they want efficiently. Then they applied that model to advertising, matching people’s queries with the content they requested. If somebody’s looking for a product, then we have 800,000 advertisers to match to it. I think they’re saying, “Let’s take this beyond just search advertising. We started with search for information, matching people’s needs with the advertisers, now we can take it beyond search and to other media.” In other words, they’re really targeting half of the advertising that’s considered wasted. They’re basically saying that the reason it is wasted is because it is not targeted. So, let’s find a way to target the advertisements to people’s needs beyond search, on TV, everywhere else. I think even if they don’t succeed they’re going to create major ripples and waves in the industry, and things will change.

Then what do you see as the implications for advertising agencies? Would they act as intermediaries to this sort of evolving landscape?
The agencies have to be very creative. They have to come up with new ways to bring publishers and advertisers together. They have to go to the publishers and say, “Look you’ve got to let these advertisers actually be part of your content.” I think agencies can play a key role. I haven’t seen that trend happening yet. Some agencies have become quite progressive, but I think they will become more so. If they don’t do it, they’ll be out of business.

In an earlier report you said Yahoo risks an “AOL-like decline.” Why do you think Web portals are yesterday’s news?
Early on people didn’t know what this medium was, and they had to rely on portals to guide them through. They didn’t know how to navigate easily, they wanted the convenience of having everything in one place, and they didn’t really trust any other brands. All those things gave portals a tremendous advantage but now, as I mentioned, people are fairly savvy, sophisticated and confident. Online has proven to be a relatively safe and very efficient medium. People basically are saying, “I can find my way around here and I’ll make my own choices on my interests very easily—if I don’t I go to Google and find it.” I think in some ways people don’t realize this but search has helped diminish the role of portals.

How would you transform Yahoo?
Yahoo still has a good franchise in its brand name and the reach of its properties. I think it has to forgo the strategy of putting everything under the Yahoo brand. They have to own properties and services that users want. Yahoo has to think of five, 10 years from now, when there won’t be much of a position for a pure online company. If you’re going to be a media company then be a global media company, and think of ways to help people get things done and help advertisers get in touch with the community. It’s kind of a long way to describe it, but I think Yahoo has to rethink its strategy of just relying on the Yahoo brand and instead look at smaller but deeper relationships with groups of people.