Transcript of Episode 35 – Ken McCarthy on the History of Online Business

The following is a rough transcript which has not been revised by The Jim Rutt Show or by Ken McCarthy. Please check with us before using any quotations from this transcript. Thank you.

Jim: Howdy. This is Jim Rutt, and this is the Jim Rutt Show. Listeners have asked us to provide pointers to some of the resources we talk about on the show. We now have links to books and articles referenced in recent podcasts that are available on our website, we also offer full transcripts. Go to, that’s Today’s guest is Ken McCarthy, internet marketing guru.

Ken: Well Jim, I’m glad to be here, thanks for inviting me. It’s great to be online with somebody that I argue with so amicably on Twitter.

Jim: Yeah, it’s also great to have another old-time internet dude around. We’ve been around since the beginning or before. In fact, Ken’s been around the internet for a long time, and he was known for his pioneering work in some of the early movement to commercialize the internet, including early experiments with white hat, email advertising, contributions to development of the banner ad, and practical applications of pay per click advertising. And believe, it or not, he was a visionary and foresaw internet video long before it happened.

Ken: That all really happened, and I can prove it. I have the documentation.

Jim: Yeah, I actually did a little research to confirm some of these claims I found on the website. As far as I can tell, they’re all true. So when did you get on the internet?

Ken: Well, it’s an interesting story. My wife wrote a cookbook, and it was nominated … Well I helped her a little bit, and it was nominated for the Julia Child Cookbook Award; this was back in ’93. And it was a public vote, so I was trying to find everybody I knew, and ever knew asking them to vote for her.

Ken: And I couldn’t find this one guy who I had gone to college with, Jim [Madole 00:01:50], and someone said, “Oh, well we don’t know his phone number, but we have his email address.” And I kind of knew what an email address was, but I didn’t have an email account. So I called a friend in Humboldt County … I used to live in San Francisco, and I said, “Could you send an email message to this guy?” And it turns out he was only living three blocks from me. He had moved all the way from the East as I did, and was living in my neighborhood and I didn’t know it.

Ken: So I asked him, “What is all this internet stuff?” And he filled me in and then he said, “You should get Boardwatch Magazine. So I walked up the street and, amazingly, on Fillmore street in San Francisco at the time, a coffee shop was carrying Boardwatch Magazine, Jack Richard sold magazine, and they were announcing their 1993 convention.

Ken: So I said, “I’ll do that, I’ll go and see what that’s all about.” And I went and I was there with hundreds and hundreds of online obsessed people; my first real exposure to that world. And I met Mark Graham, who figured very importantly in my education in all things internet in those days.

Ken: And I had this revelation that the world was going to change soon, dramatically. And had a little notebook with my one of those marble eyes notebooks with 180 pages or whatever. And by the time I’d finished the four day conference, I’d filled it with ideas and I said, “This is what I’m going to devote myself to for the next couple of years.” That’s how I got started.

Jim: Cool. So you were actually a little bit late to the party in 1993? Great.

Ken: Absolutely, absolutely. I’ll disclose this right now, I’m a technical klutz. I was a tech writer, I did write, apparently, the first manual for an ISDN modem for … What was that company that was in San Francisco downtown, they had their … Hayes. Hayes had its high end, cutting edge engineering office in San Francisco. And I was a tech writer, and I got the assignment contract to go down and write their ISDN manual.

Ken: So I kind of knew technical things, but I never was comfortable with them. And so when my boss said, “Hey, I want you to get a modem so we can send stuff back and forth.” I refused because I didn’t want to be intruded upon. So it’s funny, but that’s the reality of my technical prowess.

Jim: That’s probably what made you a good internet marketing guy, not one of these guys that was overly enamored of the shiny little objects. Funny you’ve mentioned Hayes, I go back to the early days, 1980, at the source. Which was one of the very big … In fact, it was the first consumer online internet service, and actually worked there.

Jim: And I met Dennis Hayes at the computer electronic show in 1981 where he was selling his then revolutionary Apple modems that plugged into the back plane of the Apple. I couldn’t [inaudible 00:04:29] with the CES, we had a little card table. And I then went out and met him in the parking lot, and he sold me on a very early version of the DC Hays Apple modem out of the back of the trunk of his car for $300 cash money.

Ken: That’s how we used to do it. I bought a very early CRM customer relations management software program in 1992 from a guy from the trunk of his car, literally. Yep, Mr. Rose, I can’t remember his first name; but wow, he was a visionary.

Jim: Yeah. Amazing. You came on board right about the time the internet started to go early, early, early mainstream, 1993. What makes that significant is that’s when the mosaic web browser by Marc Andreessen, it was released by University of-

Ken: Illinois.

Jim: Illinois, yeah, Illinois.

Ken: Yeah

Jim: NCSA. And I notice you also knew Mark a little bit. Mark and I became friends when he was CTO at AOL later.

Ken: Ah, okay.

Jim: But when I was also just down the road, we hit it off pretty well, so that was kind of cool. But anyway, that’s when the internet became accessible to normal people. Before that, it was character mode only, things like Telnet, and Gopher, and FTP. You probably didn’t have to deal with any of that shit, right?

Ken: No, I actually did, I actually learned that stuff. Because ’93 the browser … I had seen the mosaic browser in the summer of ’93 in August, but there was still a lot of text being used. The there was another thing that happened around ’93, give or take a few months, that was also very important.

Ken: That was when internet email became ubiquitous. In other words, all the services finally, by that point, made internet email available to this user. So CompuServe, I think was the very first to do that, Prodigy. And then, of course, all the little bullets and boards which played, I think, a really important unheralded role in the adoption of the online world.

Ken: But by ’93, pretty much everybody that was on any kind of an online system could mail to anybody else on an online system. And that, to younger people, that may seem like not a big deal, but you have to realize before the internet, online systems were islands. So if you were on CompuServe, you could communicate with people on CompuServe and no one else.

Jim: Absolutely. The old walled garden they called it.

Ken: Yeah.

Jim: Yeah. The source was a well garden, CompuServe, AOL. You kind of wonder, because I do remember that transition point before I went whole on to the internet by about ’93 or ’94; although I’d been dabbling on it since 1990. But I had email addresses on things like that. CompuServe, I can still remember it. It was 71410.3 [inaudible 00:07:22].

Ken: Right.

Jim: At Where does that email go? I should send an email to that address, see what happens. And then I had a That’s funny, me and my cousin would always see who could get Jim Rutt first on any service.

Ken: Oh.

Jim: So it’s kind of a fun little game we play. But yeah, that was back, that’s right for the audience. Before about ’93 there was a really a whole series of islands. And also at about that time ’90, in fact, we were doing it in ’93.

Jim: The company I worked at, we just implementing it, corporate email was typically on LANs and interconnected LANs, So it only worked within your corporation. So I could send a letter to a coworker, but I couldn’t send an email to a customer even in 1990 say.

Ken: Right.

Jim: By 1993, the gateways had been built, and it was fairly straightforward to send your internal mail from your mail servers, which were expensive and hard to keep running, out into the internet, it was very interesting. You’re very right, that was the second important transition phase change, as we would say, in complexity science that occurred in 1993.

Ken: I’m sorry, and I have to say, I put on this event in the fall of ’94, and in the summer of ’94 I was building up interest for it. And I was amazed at how many people in the digerati of San Francisco, as late as the summer of 1994, did not have email addresses on their business card or email at all.

Ken: So even though it was possible for everybody, even people in the business, it hadn’t clicked with them. In fact if we remember Wired Magazine, they didn’t get hip to the internet until the fall of ’94. They didn’t sing its praises, or see it as an important initiative. They just sort of saw it as something in the mix as opposed to the thing.

Jim: Yep, and again, it’s important for people who have a historical mindset to remember that. I mean today it’s all so pervasive. It’s hard to believe that not that long ago, really less than 30 years ago, this stuff was just starting to happen. I had lots of connections into that world because I was a fairly early member of something called the Well, the

Ken: Oh yeah, of course, wow.

Jim: Yeah, and I’m still a member to this day, believe it or not, and it still exists.

Ken: Do you use it?

Jim: I do. Like I do with Facebook, I typically take long breaks. Currently on about a year long break on the Well, but I promise some of my Well friends I’ll be back this month., the best conversation on the internet, no advertising and no abuse of your privacy.

Ken: And that really was, and I guess still is, but certainly was in its heyday, one of the most amazing salons on the planet. I mean, the number of fascinating people that were on The Well back in the heyday was incredible.

Jim: Yeah.

Ken: I was on The Well too, not super active. One of my buddies was Jim Warren, and we used to communicate a lot. Steve O’Keeffe, yeah, that was a great moment in history, The Well, I have to say.

Jim: Yep, and it’s still going. And while it’s, obviously, not central like it was in 1991, it is still a very interesting place to hang out. And it’s ethical, and honorable, and high level of discourse; all things we wish we saw more of on the internet these days. So we’re we’re both here in ’93, ’94, when did you start to smell economic opportunity?

Ken: Right away. Right away. Because I was in the direct mail business, which meant I was used to writing huge checks for postage, for printing to mail houses. And the idea that I could send a communication to a customer for essentially free. I mean, once I grasped that, it boggled my mind, and my calculation was, “If just 10% of my customers get on this email thing, I’ll save some money and I’ll be able to communicate with that 10% segment more often.” That was my initial thought.

Ken: And then I started thinking about things like FedEx packages, gee I could just attach a lot of photographs to an email and send it for free, and get it there faster than FedEx. So just the simple savings in communication immediately sold me.

Ken: My only question was, was it going to catch on it? And I have to say when I went to that BBSCon conference in ’93, there was a panel and the subject was, “Can the internet be commercialized?” And you now had it legally it was … And this is another thing we need to tell younger people or people that don’t have the historical perspective. It wasn’t legal to use the internet for commercial purposes until … I have the date somewhere here, sometime in 1989.

Jim: Yeah 1990, 1989. There’s a lot of argument about exactly what you could do when, but that was about the time.

Ken: Yeah. And so what that did was we had a whole generation of people that were involved in building the internet with the attitude that this is not a commercial space. So when NSFN, I guess is their acronym, said, “Hey, guess what guys? You can do business.” There were crickets initially.

Ken: In other words, the culture of wheeling, and dealing, and buying, and selling, and promoting didn’t exist in the internet culture when the laws were changed. So there was a little bit of a gap before people like me showed up and said, “Okay, how can we make this thing work on a commercial basis?”

Jim: Yep and you’re right. Because I was, again, part of those discussions. And you’re also right that that very interest in intermezzo between the walled gardens of the CompuServe, and AOL, and the internet, there was this BBS world. And a lot of the early people that got involved on the commercial side of the internet actually came out of the BBS world.

Ken: Absolutely. I mean they had the model, subscribers and providing access to people, providing content to people. So all that … That was the other thing that sold me when I went out to that conference in ’93, and I saw the passion that these folks had for the online experience. I realized, “Well if these people love it, then this is something that is possible for the nervous systems of other people.”

Ken: In other words, there was probably a time … In fact, I know there was a time when movies were first invented, and it took a while for people to get comfortable going to the movies. There’s reports of when the train arrived on the screen, some people would lose it and run out of the theater assuming they were about to be run over.

Ken: I heard another funny story recently about the early days of Texas, and there was some bad guy doing something bad to a damsel in distress, and some guy literally took a six gun out of his pocket and started shooting the screen.

Jim: [inaudible 00:14:02]

Ken: So yeah, you don’t know whether a medium’s going to catch on or not. You don’t know if it’s neurotically, or neurologically congruent with human beings, right? But when I saw the passion that people had for sitting in front of screens, and communicating, and downloading, and doing all the things they did, I said, “Well if this little cadre of people is this into it, then it’s neurologically congruent for human beings. And if it is, the only barrier is to make this thing fast, easy, and cheap.

Jim: Exactly.

Ken: And then everybody’s going to be on it.

Jim: You saw it, you made one of those great life insights and you were right.

Ken: Well, oddly enough we’re … I don’t know why this is, because I don’t know how long humanity’s been around, but it’s a long time. And suddenly in the last 120 years or 150 years, we’ve become screen watchers. First it was the movies, then it was TV, and I just thought, “Well this is just another version of screen watching, and apparently we are again, neurologically congruent to sit in front of screens and watch flickering lights. It might go all the way back to the campfire.

Jim: Yeah, [inaudible 00:15:09] somebody telling a story, right?

Ken: Yeah, and the thing’s flashing, and you’re sort of sitting there looking at it.

Jim: Hey I never thought of that one. I’m going to add that to list of possibly true, but probably not hypotheses. I liked that one a lot actually, I can see it now. Okay, before we get into some of the early evolution of the commercial internet that can be useful for our audience, who are mostly not marketing professionals, to go into the distinction between brand advertising in marketing and direct response. I suspect you’ll talk mostly about direct response, but it might be useful to make that distinction for folks.

Ken: Very good. You hear the term branding a lot, and it certainly is incredibly valuable to possess a successful brand. However, building a successful brand is a really, really expensive process; so that that’s one consideration.

Ken: Some brand advertising is to build the brand, but the vast majority of brand advertising is to maintain the brand. So when you turn the TV on, and you see … I don’t even know if we see Coke and Pepsi commercials anymore; I haven’t seen one in awhile. But I remember growing up there’d be Coke and Pepsi commercials all the time.

Ken: They weren’t selling you on the idea of soda, or the idea of Coke, or the idea of Pepsi, they were just reminding you so that when you were in the store, and had the choice to make, you had the Pepsi theme running through your mind, so you’d grab Pepsi. To me that’s an example of brand advertising. It’s saturation, it’s expensive, it’s unmeasurable to a certain degree. And the whole point is just to get you, when you’re in the store, looking at the shelf to remember that, “Oh yeah, Pepsi’s the thing.” Or whatever the slogan was.

Ken: Direct response is a whole other kettle of fish. It grew out of the catalog world of the 19th century, it’s measurable; that’s its most important feature. You run an ad, you know exactly how much the ad run costs, you know exactly where it appeared. And because you can key the ad, which is changed the order form slightly so that it’s unique to that particular ad and that placement, exactly how many dollars you made back; that’s how closely they measure things.

Ken: And that allows us small business … Small being less than $10 million a year, to go out there and start selling, actually book transactions. And it’s a very, very simple model; dollars in dollars out, “I spent so much money on the ad, I got this many orders.”

Ken: Usually you do a little calculation, you think, “Well, I realize I may not make a full profit the first order, but this is a repeat sale, so there’s a lifetime value to the customer.” So yes I can keep running these ads. So an infomercial is sort of a classic example of a direct response ad. So long ones, long form, they put down their money, they buy the time, they produce the commercial and they run it.

Ken: As long as the phone rings, and the phone rings profitably, they will run that infomercial forever. The day it stops being profitable, they stop running it, and try to come up with the next thing. So I’m from the direct response world, which is we measure everything, because we don’t have the budget of Coke or Pepsi. So that’s the difference between brand advertising, in my mind, and direct response advertising.

Jim: Yep, that makes perfect sense. I mean, I was also involved in some businesses that generate a surprising amount of dead trees back in the paper-based, direct response modeling world. And you’re absolutely right though. The whole business was about capturing enough information to run the numbers, to see if what part of the matrix you were marketing to worked. Ramp up your dollars there, and ramp down your dollars elsewhere and, hopefully, you’d make a winner out of it.

Ken: Exactly.

Jim: [inaudible 00:18:56] and we both know what a … At least once we figured out how to do it, what a revolution the internet was. And tell me about the very first thing you tried to do commercially on the internet.

Ken: Wow, let me think. I mean, one of the things was promoting my events, because I was putting on conferences in the Bay Area. Believe it or not, it was very hard to convince people in the, then, called the multimedia industry, who were the digerati of San Francisco at the time. And it was very hard to convince people in the software industry, just in the mainstream software industry, that the internet offered any promise whatsoever.

Ken: And CD-ROMs everyone … They’re ubiquitous now, they’re no big deal. We probably don’t even use them anymore because we have the internet. But there was a period before CD-ROMs were commercial items, and so you had this whole industry of people in San Francisco that were custom making multimedia presentation.

Ken: So IBM needed some kind of a sales thing, so these guys would create these laser disc type things that the salesman could either bring on the road, or they could show at conferences. So there was a big solid infrastructure of San Francisco of people that could make multimedia interactive communications.

Ken: They did not for, for the most part … Well it’s not fair to say. Fully half of them did not get that the internet was going to be important to their futures, as late as the summer of 1994. And one of the things they would tell me is like, “Well I can’t stream my multimedia over the internet, the bandwidth’s too small, so why would I even want to get involved in this?”

Ken: And I just would slap my forehead and it’s like, “Guy, can’t you see this is coming?” It’s like it’s so obvious. I’m not a technical guy, but my thought was, “All right it’s slow now, but I see these modems are getting faster every season. I think the technical guys can figure out how to make them even faster.”

Ken: I mean, I always think of well they laid a cable from England to the United States on the floor of the Atlantic Ocean. If they did that, they can make modems move faster, right? I mean, how hard could it be? I didn’t think it was going to happen overnight, but I saw it coming.

Ken: So that was my first businesses, besides helping people do little things. We had a hosting company, we would build websites for people, but my main business from ’94 till 2011 was teaching business people how to use this thing effectively.

Ken: So my first business ventures in the internet world we’re bringing the, then, internet commercialization experts together for audiences and trying to explain, “Guys, this is what’s coming, this is how it works, this is how you might use it.”

Jim: Very interesting. Did you try to promote your own businesses other than how to [inaudible 00:21:47]? It almost seems recursive here. I’m using internet marketing to market to people and teach them internet marketing. Did you ever use it for something with more real bullets, like they sell a product or service?

Ken: Well I’ve got a couple of websites that I run now that kind of fit that model. One is called Jazz on the Tube, and it’s a service for people that love jazz. And every day we put out an email pointing them to a jazz video we found, and then we run advertising. What else do we do?

Ken: We solicit support, because jazz fans are really into what they’re into, and they’re willing to support the thing above and beyond. It’s a free service, but sometimes we say, “Hey, kick in some money.” And lo and behold they do.

Ken: Yeah, I sold my conferences online but, interestingly enough, in ’94, you couldn’t sell the conferences online, because there weren’t enough people online to make it really work. So I had to do the selling the old fashioned way, I had to go to Chamber of Commerce meetings, I had to make alliances with trade associations, and mail to their mailing lists. So my original efforts to promote the internet were mostly done offline the old fashioned way.

Jim: Yeah, I remember that we all had to do because, as you said, you can’t sell to get people online. I mean, the most famous example of that was the AOL CD-ROM bombing of the world. I mean-

Ken: Right.

Jim: Literally billions of CD-ROMs that they drop all over the United States and Europe to get early adopters on AOL.

Ken: Right. And that was kind of a direct mail play, or direct marketing play for sure. I assume they did the calculation that, “If we mail X thousands of disks, we will get X hundreds of new subscribers. Each subscriber will be worth X and it will all work out in the end.”

Jim: I happened to meet the woman who actually came up with the idea for that campaign and she said, “Yep, they did some back of the envelope simple calculations but, frankly, they were so desperate to find something to crack this conundrum, that they just punted and went for it.”

Ken: Yep.

Jim: Committed a fair amount of money. They did not do what you and I would have done as our own startup entrepreneurs, they dumped a shit load into the first shot, and it did fortunately work. Then they got serious about hardcore, direct response marketing metrics. Yeah for a long time and I don’t remember … When did the AOL bombing occur? I have to look that up here online?

Ken: During the 90s.

Jim: It I think it might even been a little for sure than that even CD-ROM.

Ken: Well, I mean, I remember AOL being so small that I could write Steve Case and he’d write me back.

Jim: Yep, yep.

Ken: And they were pretty small in the early 90s.

Jim: Yeah here it says, “Between 93 and 2006, AOL sent out more than a billion CD-ROMS.”

Ken: Oh my God.

Jim: We were both right. It was in the 90s and early [inaudible 00:24:39]. It was late as 2003 they were still doing the [inaudible 00:24:43]. It used to be a kind of a pop culture stunt to see what kind of cool things you could do. One friend of mine took all the CD-ROMs he’d received from AOL and turned them into ornaments for his Christmas tree.

Ken: There you go.

Jim: Yeah, I knew somebody else who turned them into coasters. And whenever he had guests over, he’d hand out AOL CD-ROMs with the little rubber feet glued onto him; so that was kind of interesting. Now the other thing you talked about, and this is something I was tracking always, was the transition on what is it feasible to do online based on bandwidth?

Ken: Mm-hmm (affirmative).

Jim: Right?

Ken: Mm-hmm (affirmative).

Jim: In the earliest days, in 1981, text was all you could do basically, right?

Ken: Yep.

Jim: Then it was images in the mid-80s. And then it was audio, which you could do on a store and forward basis, but not real time in the later 80s. Then it was real time audio in the very early 90s. Then it was downloadable video where [inaudible 00:25:37] forget this little era where people would want to watch a movie. Typically, you’d get it for free from some pirate site, but it might take 12 hours for a one hour movie.

Ken: That’s right.

Jim: Yeah, the earliest days of pirate videos sites were all non-real time. And then finally, streaming video finally came on. And remember, it wasn’t that long ago that Netflix was in the business of sending out CD-ROMs.

Ken: Yeah.

Jim: Remember that?

Ken: I do.

Jim: And I will give them credit, amazing credit, huge balls because they, they knew that the real play was streaming video, but they decided to preempt that marketplace. They would invest that bazillion dollars in owning the CD-ROM mailing back and forth business, which was an insane business to be in. It could never possibly make any money.

Jim: I don’t know how much they raised, but it was a shit load to dominate that business. And there was a period when Wall Street thought they were nuts, and the transition wasn’t going to happen fast enough for it to all work, and their stock price collapsed; I mean, to a really low level. If anybody had bought Netflix stock then, they would have a pile of dough. But they were right, and rode that transition, and now they’re probably the dominant entertainment company in the world, or at least number two behind Disney,

Ken: Which is amazing considering how young accompany they really are. I remember the Netflix physical business was so big that in my little village where I live, the post office decided to devote an entire window just to Netflix returns; not a window, but a slot. They had a Netflix slot because the volume was incredible when that thing was going. Yeah and they acquired the customers, and then when we all went online, they had us.

Jim: Now here’s something that’s going to blow my … It blew my mind, it’s going to blow our audience’s mind too. Netflix didn’t launch its streaming business until 2010.

Ken: Wow.

Jim: So it’s only nine years old, and already we have cultural memes like Netflix and chill, man. It’s only nine years old, that’s ridiculous.

Ken: Yeah, yeah.

Jim: I would’ve said it was older than that, but nope that’s what Wikipedia says, and we know they’re not allowed to lie on Wikipedia, huh?

Ken: Yeah, yeah.

Jim: Yeah.

Ken: Do you know there’s a page, speaking of Wikipedia, do there’s a page on Wikipedia itself that states, “Do not believe anything you see on Wikipedia, and do not even use Wikipedia as a source about information about Wikipedia, we’re so unreliable.” It’s on there, so it’s very funny.

Jim: Of course, there’s been some tests done in the last five years, it showed that on average Wikipedia is more accurate than Encyclopedia Britannica.

Ken: Really?

Jim: Yep. And it makes sense, because it’s updated in real time, it’s crosschecked. Now, of course, it does not apply to highly controversial topics.

Ken: To say the least.

Jim: Yeah it’s like Hillary Clinton, or look at the article on Gaza strip or something; those things are edited hundreds of times a day in a bad faith, horrible kind of fashion.

Ken: Yeah, it’s a shame because, you’re right, when they’re on, they’re really on; Wikipedia. Especially on the science stuff, and the chemistry stuff, and the biology stuff; oh my God.

Jim: And history too. Amazing, right? Obscure little battles that no normal military history buff, and that yeah you can chase down some monographs someplace that costs you $100 for an out-of-print monograph, or you can read an amazing, quite detailed article about [inaudible 00:29:04].

Ken: True. And I love jazz, and so I’m interested in all the history. The historical information about the history of jazz, and the musicians; incredible, just incredible, yeah.

Jim: Well back to the actual doing stuff, your clients who you were teaching direct mail stuff to, what were they doing in the early days?

Ken: Oh, everything under the sun. I’ll give you an example, this is one of my favorite stories. His name is Lloyd Irvin, and he was a biz, a martial arts person. He won Brazilian jujitsu world title twice. Really high level guy, he trains all of MMA fighters now.

Ken: And he decided to take his knowledge, and systematize it, and package it, and make it available via the internet; this was back in 2003. And he went out and built a really huge business for himself. A lot of these guys, in that industry, they make money from their bouts, and they make money from training, but it’s kind of short money at the end of the day.

Ken: And you can only fight so long, and then you just can’t take the bang ups anymore, and they end up in not very good financial positions. So here’s a guy who’s he’s got multiple businesses now online, because once he figured out how to do it for MMA, or for martial arts, he learned the formula. Which is find a hungry market, which is very important, come up with good offers for the market, and put ads in front of them, and make sure the ads pay out. So he’s doing very well.

Ken: I had another student who … There’s a lot of weird businesses, wedding party favors. Which you’d think, “Well what kind of a business is that?” And the reality is everybody that gets married and has any kind of reception gets wedding party favors.

Ken: So they were bringing over their own container loads of custom made things from China that they … With huge markups of course, and they did all that marketing via the internet. Then my website, Jazz on the Tube, I compete head to head very well with Jazz Times which is, in the jazz world, a fairly large organization with dozens of employees. And Downbeat, another large-ish organization for my industry with dozens employees, and decades of track record.

Ken: Well when it comes to web traffic, sometimes I’m ahead of Jazz Times, I’m always ahead of Downbeat; so those are some examples. We’re mostly selling information though, the wedding party favors is an example of somebody selling physical … And that business got to 20 million a year, believe it or not. I mean, I find it hard to believe myself, but a lot of people get married.

Jim: Yeah, and for dads that are paying the bills, aren’t necessarily utterly price-sensitive either.

Ken: Do you have some daughters in that category?

Jim: I have one daughter, fortunately, successfully and happily married off five years ago.

Ken: Congratulations.

Jim: Been lighter ever sense. But hey, it was well worth it, it was a wonderful event. But I do notice that you point to the fact that high net margin businesses are easier in a direct response market.

Ken: Oh, it’s essential, yeah, it’s essential. In every business really if you can get away with it, you really need those high margins; there’s a lot of bills to pay. And as a civilian, you look at the margins and think, “Well that’s unfair. How could you charge 10 times what it costs you to make?” Well because I’ve got inventory, and warehouses, and employees, and advertising, and utilities, and insurance, and all the things that go wrong. I need that eight to 10 time margin.”

Jim: Yeah. At least six, a 60% gross margin’s the lowest I’ll look at typically. But I do love that 90% gross margin, which is typical of a mature software business, and for an online information business it might be closer to 95.

Ken: Yeah. And my conference business-

Jim: Yeah.

Ken: Definitely was very high up there in that. Yeah, information’s a great product, the price is elastic. What’s good information worth to somebody who really, really wants it? And what does it cost to produce? Well there’s the research, of course, but once the research is done, the actual form is trivial even when you’re printing books and sending books.

Jim: Yeah, I was in the publishing business first in books, and then an online most [inaudible 00:33:25] career. And I used to say something at industry meetings, and company conferences, and stuff; which I’m sure they’d put me in HR prison if I said today. Which is I used to say, “The information business is like the prostitution business. You got, you sell it, and you still got it.”

Ken: Yeah, we probably can’t say stuff like that anymore.

Jim: Unfortunately. We can on a podcast. Fuck them if they don’t want to hear it.

Ken: Yeah, fuck them if they can’t take a joke.

Jim: Yeah, that’s why I love podcasts. It’s part of the emergent radical media fringe that’s under nobody’s thumb, no gatekeepers, which is amazing.

Ken: It really is a beautiful thing. How many great voices and interesting people are doing stuff that would have been absolutely financially unsupportable pre-internet? I mean, more than we can even imagine.

Ken: For every hobby, for every interest, there’s at least one guru who’s doing great, and probably a dozen of them doing really specialized media that just otherwise wouldn’t be supportable. So that’s one of the things I saw right away. Because I was somebody that loved information, and loved publishing.

Ken: I had a business before the internet, which was really a money making business, but I was putting on conferences for people in the real estate finance industry. And from that experience, and before that I had a business teaching speed reading and study skills to college students, which I loved doing.

Ken: And it was hard to make … We made money, but it was hard to make a living pre-internet because you were sort of constrained by print and ink, and geography to a degree. But beautiful thing about the internet it’s open, the whole planet can be a customer potentially.

Ken: And so I can have customers from Singapore, and from Finland, and from Bolivia, and from Japan that otherwise I never could have reached. Talk about brand awareness, I mean, how do you reach somebody in Japan from the United States if you don’t have the internet? It’s never going to happen.

Jim: Yeah, it’s quite remarkable. In fact, one of the surprises to me in my little podcast venture here is only about 50% of my listenership is from the United States; the other 50% is scattered all over the world. I mean unbelievable, Malawi, Cambodia, there’s a few. And there are some, I think, there’s four or five countries that actually have higher per capital listenership. I actually pulled my listenership data, by country, and cross-referenced the country population, and they have a higher per capita listenership in the U.S., Australia being number one.

Ken: Wow.

Jim: And one of them was a non-English speaking country. Sweden did about 12% better, per capita, of listeners to my podcast than the USA. And it’s amazing to me, right to your point, the internet just gives us the ability to address the whole world for very, very, very little money.

Ken: Yeah, this is something that’s so easy to take for granted and forget. But you and I both remember what it was like before and you couldn’t do things like this.

Jim: Absolutely. Well this has been a bunch of great background. Let’s switch now to the nit-I-grid-I. We got ourselves a marketing guru, let’s have him guru-ize a little bit. As I was looking through your books, one of the things that caught me first was you called it the secret, “The only thing you really need to know, the battle is won or lost on day one. When you pick your market, successful marketing and not so much about what you market, or how you market it as it is about who you market it to.” Tell us about that.

Ken: Well I think it’s so important. Different markets have different levels of responsiveness, and different levels of financial potential. This is an example I use a lot, taking two different sports, tennis and golf. You don’t see a lot of direct response people going into the business of selling stuff to tennis players, and it’s worth thinking about why that is.

Ken: Well, tennis players have one racket, maybe they’ll get a new one every now and then, but they tend to like a particular racket. They might buy a bunch of them so that they have … If they’re serious players, they can replace them quickly. They get their rackets restrung, and they have to buy cans of tennis balls, and that’s pretty much it.

Ken: Now golfers, on the other hand, they need the new dri- … I don’t golf, but I was a caddy for two years as a kid, and I observed this firsthand. They need the new driver, they need the magic putter, they need the magic golf balls, they need to learn the new improvement on their swing. There’s just 1,000,001 things that, for some reason, the golfing community is willing to spend money on.

Ken: So if somebody went into business thinking they could make a living selling to tennis players, they’ve got a tough road. If they’re going into business trying to sell to golfers, it’s actually almost laughably easy. I had a friend that was selling, via the internet, special vitamins specifically … And this was ludicrous, but it actually made some money, special vitamins formulated to the needs of golfers.

Ken: It’s crazy, but a buyer is a buyer, is a buyer. So if you’re going to go into a business, you’re kind of looking for pockets of people who are buyers. And I know that sounds ridiculously simple, but I’ll give you another example that might help.

Ken: I had a student, also in the martial arts arena, he had been a college wrestler, pretty good college wrestler; he wrestled for Nebraska. He wrote the ultimate book on how to be a successful college wrestler, and it died on the vine.

Ken: And the reason was college wrestlers are not buyers. They go to their workouts, they listen to what the coach says. They’re not buying books, and courses, and tapes and going to this conferences on how to be a better college wrestler; it’s all a self contained unit.

Ken: So he had a brilliant idea and it’s made him definitely deep into eight figures at this point; he sells martial arts stuff. He just transferred his wrestling knowledge to the broader world of martial arts. Now people that are into martial arts are kind of lunatics. That if you’re really into it, you learn how to punch, then you have to learn how to block. And then you learn that, then you have to learn a punch that overcomes that block, and you have to learn how to kick, then you have to learn a new kick that evades that kick.

Ken: Then you have to learn how to fight with knives, because someone might come with a knife. Then you have to learn gun disarmament, then you have to learn oh, that’s no good. Now you have to learn ground fighting. Well that’s not very good, now you have to learn the new ground fighting.

Ken: It’s endless, and if you see magazines like Black Belt, for example, which you could probably see at Barnes & Noble on the … If it’s politically correct to sell that magazine in public anymore, you’ll see it’s loaded with direct response ads. Why? Because they are ravenous buyers.

Ken: And you get that sale and if you don’t screw it up, you’ll get many, many more opportunities to sell them more, and more, and more, and more, thus building up the lifetime value of the customer, thus raising the amount of money that you’re able to spend on advertising. Which we talked about earlier in the call, which is it’s all numbers in, numbers out.

Ken: So picking your market is so important. Can I go on to that? I’ll riff on this because if you look at Facebook, how did Facebook start? And there was no grand scheme it … And, by the way, this is I think very important for everybody listening who wants to do something in life.

Ken: Chances are when you’re doing the best work that you’re ever going to do in your life, as you’re doing it, you’re going to have the feeling that you don’t know what you’re doing, and you don’t know what’s going on, and you’re not sure where it’s going to lead. And it’s only in retrospect that you’re going to look back and go, “Wow, that was brilliant.” That’s been my experience to life.

Ken: You find something you’re interested in, you love it, you give it your all. For some reason, it captures your imagination. You’re as practical as you possibly can be while you’re doing all that, but you just dive in.

Ken: So what was Facebook? Well, Facebook was … Well we had Facebook’s in college. Most private colleges published a physical Facebook, literally. Because the young guys aren’t going to know this, but you’d arrive as a freshman, and they’d give you a book, and it had a picture of everybody in your class with a little where they went to school, what clubs they were a member of, and where they were from. So all that Facebook was making that electronic.

Ken: That was a ravenous market you knew because of … And I remember as a college student, I was reading that Facebook every night, checking out the girls seeing, “I wonder if I can meet this one.” So you already knew that there was a ravenous consumption for Facebook-type information.

Ken: So that was an accidental backing into an amazing market. And then once he got Harvard online, he realized, “Oh my God, I’m in the nexus.” As you know, Boston, Cambridge, I mean, you throw a rock and you’re going to hit 20 schools. So he immediately networked all of Boston, Cambridge, that whole area, and then it was just a logical leap to go to all the other universities in the United States. And I have a video somewhere in my archive of him saying, “We just want to do colleges, and we’re done.”

Jim: Yeah.

Ken: So but he lucked on to a ravenous marketplace. Now if he’d gone into creating an online resource for tax attorneys, we might never have heard of him.

Jim: [inaudible 00:42:51] Thompson, we had a $400 million business selling information to tax attorneys and tax practitioners. How about that? But it took decades of hard work to build that business; it certainly didn’t explode.

Ken: Exactly. This is, I think, an important marketing story too. When Wozniak and Jobs created the first computer kit, it was Wozniak that made the business decision; I don’t think people realized that initial. And then Jobs took it the rest of the 99 yards.

Ken: But that first yard was Wozniak, and his calculation was beautifully, elegantly perfect. He said, “Let’s see, there’s 50,000 ham radio operators in the United States. That means there’s at least 50,000 guys that are nutty enough to buy a kit to make their own computer. We can probably make a few bucks doing this.”

Jim: Yeah, right, right. That’s exactly kind of thing he would have said.

Ken: Yeah, and he was right. There was him using that principle of, “Hey, there’s a ravenous market.” it’s not like, “Oh I have a product, I think it’s great.” No that’s not it. You look for a pocket of people who are really into something, and you supply them.

Ken: That might seem overly simplistic but trust me, I just turned 60 and I’ve done this a while, and I’ve seen thousands of success stories, and many, many more not success stories. And it always seems to boil down, “Find the hungry market and serve it.” Don’t come up with the newest, amazing thing and try to ram it down the market’s throat.

Jim: That’s great advice. Another bit advice you had, probably a little less relevant now actually, because the internet makes it so easy. But back in the paper direct response days, one that we have to pay a lot of attention to you’ve described as, “You must be able to easily reach your market.”

Jim: We used to rule out products based on what we call the needle in a haystack problem. Yeah, there’s a million people who would buy the product, but there’s no way to distinguish that million from the 300 million in the country.

Ken: Mm-hmm (affirmative).

Jim: Can you talk about that a little bit?

Ken: Yeah, again, it’s just logic. And strangely enough, there’s a lot of fantasy in business thinking, and not just among civilians or amateurs. And there’s this idea, “If I have the great product, the world’s going to beat a path to my door.”

Ken: There’s also the fantasy, “Oh, if I write the great ad, the world is going to beat a path to my door.” And, yeah, it’s good to have a good ad, but you also need to be able to put that ad in front of the people who are going to care and do it economically. And I don’t mean inexpensively, I just mean economically in the sense of dollars in, dollars out.

Ken: So if you can’t clearly figure out how you’re going to put your message, or your product ,or your offer, or whatever it is in front of the right people, you don’t have a business opportunity, you have a an idea and ideas, as they say, are a dime a dozen.

Ken: So the internet hasn’t, necessarily, solved the problem. You still have to figure out, “Okay, where are the people?” I mean, it’s a little bit easier, but where are the people who are going to be interested in this offer?

Jim: And sometimes it’s curious like, for instance, my podcast. I do a small amount of promotion, so far just experimental to understand the shape of the field. But I initially started doing just some regular small scale Facebook advertising; it didn’t work at all. Right?

Ken: Yeah, yeah.

Jim: Why is that? I said, “You dumb idiot, you should realized before you spent your $50.” Which is only a relatively small minority of people listen to podcasts. So, yeah, yeah, if you say, “All right, give me everybody in the state of Virginia, some random sample, and push them to my podcast.” Most of them are saying, “I don’t get my shit about podcasts.” And even if I do accidentally click on it and go, “I’m not interested in podcasts, fuck this.”

Jim: And it actually, to your point, tricky to figure out how to zero in on people who actually do listen to podcasts. And it took me several iterations, and I think this year I’m going to push a little stronger on marketing now that I have figured out there is a way to find a concentrated enough market of podcast listeners. But a naive approach didn’t work at all, it was off by a factor of five, and it took some incremental experimentation to find out what worked.

Ken: I have a friend who, sadly, passed away two summers ago, James Martel. And he had, as far as he could tell, the longest continuously running podcast on the internet. Not the original one, because the original one discontinued, but the longest running one. And he came up with a few gems of, of course, is get on as many related podcasts as a guest as you possibly can; that’s just the golden method.

Jim: Yeah, I’ve been on that, six or seven, and I’m going to do more this year. And he’s absolutely right, and it’s cheap right now. Hours worth of your time, and you reach thousands of people.

Ken: And every person you reach is qualified on at least one level; you know they’re a podcast listener.

Jim: Yep.

Ken: That raises an interesting subject. If somebody is doing a direct mail campaign, and let’s say they’re selling … I’m looking around my office for something irrelevant. I’m going to say they’re selling Steed … Believe in or not, I have a CD player in my office still. They’re selling CD players.

Ken: What’s the most important thing to have if you’re going after a list of prospects for CD players? Well one, of course, is that they are interested in CD players. But there’s another element which is absolutely essential, which is that they a known mail-order buyer, right?

Ken: So in other words, it’s not just enough that somebody’s in the direct response world, it’s not just enough that somebody’s interested in the product category. That’s good, you need that, it’s sort of a fundamental. But you also have to blend in the element that this person, at some time in their history, hopefully a lot, has made mail order purchases before.

Ken: So when you go to, let’s say, to a list broker, someone that you say, “Hey, I got this thing, I want to sell it, do you have lists of people that love music?” “Okay, here’s people that love music.” Now I want a responsive list, I want a list of people that have bought via this channel before.

Ken: So when you’re a guest on a podcast, the great thing is you know that 100% of the people you’re in front of our podcasts users, so that’s really good. The other thing that he taught me that’s so obvious it didn’t occur to me, is that people search.

Ken: People that are into podcasts and are doing searches on particular topics, search for things. And you want to make sure that you have a really good, and detailed description of your show with just the kind of keywords that we used to put on pages, on the web to make sure that they were finable by a search engine. And that turns out to be a pretty important thing. So put as many buzzwords and related words as you can in each description of the show.

Ken: And the other thing he said is use every conceivable syndication service out there. They cost nothing, at least currently, and some people are going to want to listen via this syndication service, some people are going to listen to that. So you might as well make yourself available to every possible person.

Ken: So those were his secrets. Oh, and the other thing too, at the beginning of the show, at the ending of the show asking people for their email addresses, and encouraging them to share the show. Maybe being religious about that, he was emphatic about that.

Jim: I must admit, I have done that last one; the other ones I am doing. I probably should, the other one I hear it’s very successful podcasters do is ask for five star ratings on their podcasts apps.

Ken: Yeah.

Jim: I haven’t done that either. I used to be a shameless promoter, never used to never be unwilling to do such thing, but so far I’m a little shy on this podcast. Maybe that’d be one part of my 2020 marketing campaigns, get a little stronger about asking people who love my thing. I’ve got all five star ratings pretty much, and everybody tells me they like it. I don’t know, they don’t seem to be lying, and numbers keep growing. So maybe I should start asking people to do more to help promote it; that’s actually a great idea.

Ken: And that’s one thing you learn from direct mail is ask, ask, ask. I remember this really simple experiment that was done, they were trying to persuade college students to get the flu shot. So one version of the ad gave all the reasons why it’s a good idea, or why the people providing it thought it was a good idea.

Ken: And the other version did the same thing, but it showed a map of where the clinic was, and how to get there. And just adding that little bit of concrete how-to information, that explicit direction boosted the response enormously. So little things can make a huge difference like just saying, “Hey if you enjoyed it, give us a five star rating, or give us the rating you think we’re worth. Tell your friends, you might have a friend that likes this kind of stuff.”

Ken: My jazz site, it fluctuates a lot; I haven’t looked at the numbers recently. But it banks between 30 and 40,000 email subscribers; I’ve never advertised it. Now I had the advantage of starting when video on the internet was brand new. And that’s our main thing, is we have thousands and thousands of classic jazz videos, so I got a bit of a run up that way by being early.

Ken: But still we grow by the thing being passed hand to hand, and it makes sense in a networked world like the jazz world. People have their jazz buddies, they go out and hear music together. They hang out on various online sites, so there’s quite a bit of natural sharing. So I’ve built that entire business with no advertising.

Jim: That’s amazing. And being there first, of course, helps. But then you also have to have good execution, which you must have, you’re still here lo these many years later, and at least tied for number one with some of the big names in the business.

Ken: And unlike them, I am focused on getting my users to share the information. So we ask, we say that in every email and they don’t do that. They’re very corporate, they’re very buttoned up and everything’s very proper. And I’m willing, to a degree, to shamelessly beg, and I think that’s made all the difference for me.

Ken: Also I mail every day. Now that takes a lot of work, and some people might say, “Well gee, that’s kind of excessive, people are going to be disgusted getting email every day.” And the answer to that, for me, is if they’re into the subject, they’re going to love it, and they’re going to wish that I mailed 10 times a day. And if they’re not into it, well yeah they might be annoyed, but that’s not my customer anyway. So my daily email, I think, does a lot to keep me very competitive with the bigger companies.

Jim: Yeah, and I have not been too assiduous at collecting emails either. The website allows people to subscribe, and they get an automatic announcement. But truthfully, it’s not a huge number of people do, most people listen to podcasts, listen to them on their apps-

Ken: Mm-hmm (affirmative).

Jim: On the website, so relatively hard to capture email for a podcast; will have to give some thought to it. In fact, I noticed you had interviewed my friend Ryan Holiday-

Ken: Ah.

Jim: Long ago, and I was chatting with him, I don’t know, about a year and a half ago about something else, and he was just repeating again and again, “Everything is your mailing list that.” And that is he [inaudible 00:54:23] amazing job of creating this amazing empire from absolutely nothing of all of his various online properties and personas, and what have you.

Ken: It’s the most improbable business in the world. I mean, this is an example of what I was saying earlier, who could have imagined a young youngest guy … I don’t think he’s even 32, making a good living selling stoic philosophy to the masses. I mean, that’s impossible, but he’s doing it.

Jim: And before that it was book reviews, right?

Ken: Yeah.

Jim: [inaudible 00:54:53] takes on books. He’s an amazing guy, I’ve met him a couple times, we chatted several times. So he’s actually my go to guy if I want to hear what’s the current best thinking about such things. Oh I may add you to my list, you obviously thought about this a whole lot too.

Ken: On the book marketing side, wow is he a wiz; holy smokes.

Jim: In fact, I first ran into him when he had just done the magic that it turned Max Tucker’s book into a mega [inaudible 00:55:17].

Ken: Oh wow.

Jim: Quite a book by the way. What was it, Welcome to Hell or something like that?

Ken: Yeah. Yeah. I hope they have beer in hell or something; something like that.

Jim: Okay [inaudible 00:55:28] hell. I just read the book and then I saw Ryan speak at a conference, and I went up, as I will do, and just button holed him and we started talking, and we just happened to hit it off, so-

Ken: Oh great.

Jim: Yeah that’s kind of cool. Well let’s move on a little bit to get a little bit more of the tricks of the master here. I was actually quite happy, think a marketing guru, what kind of cynical piece of shit is this.

Jim: But I have found very little cynicism, at least, in your books. And I like the fact that when you talk about your copywriting rules, there are no copywriting rules. Knock offs are for losers, not winners. And in reality, great ad copy comes for passionate, caring, not BS hype and con-artistry. That’s just great.

Ken: Yeah, it’s a weird field that I’m in. There’s definitely a segment of the direct marketing society that doesn’t think that way. But all I can say is I’m still around, and I’m doing well, and a lot of those guys that were smarter than everybody else are gone. I mean, they’re literally gone, I don’t know where they went to, but they’re not in business anymore.

Ken: I think ultimately … I mean, at least from my point of view, ultimately you have to be on your customer’s side. I just don’t know how else you could be in business; that’s my bottom line. And I think you can make plenty of money doing it that way. I never understood these guys that felt that they had to cut corners, and trick people; I don’t know-

Jim: It’s not a [inaudible 00:56:55] a longterm franchise. It might be a way to make a quick buck strip mine some keyword on Google, but it’s not a way to build a really cool long-term property like your jazz site.

Ken: Yeah, and then they’re gone. I mean, when you teach marketing, you’re going to meet everybody. And I’ve met everybody, and I can’t tell you the number of guys that have gone out and strip mined a marketplace, made a lot of money, and now they’re broke and they can’t get arrested.

Ken: They just can’t get the next thing, because the thing that they were doing was coming from a, I don’t know, a pure X place of pure exploitation. As opposed to hey value exchange. And you have to make money, you have to make a profit, you’re entitled to high margins as long as your service is great. But yeah, it’s just funny how some people just … I don’t know why they do it, it still is a mystery to me. It’s like you can make all the money in the world playing it straight.

Jim: And [inaudible 00:57:53] too. You build a great business with great customers, where there’s a value exchange, and that’s key, then you’ve got something that’ll keep providing you an income for a long period of time. As opposed to being a strip miner, “Okay, I tried five things, I got lucky once. How many more do I have to try before I get lucky again?” That’s really all it is.

Ken: Well, yeah, and I’ll give you a great story. This is out of Virginia, This is a guy who had another improbable business. He sold the ingredients for making your own fireworks. Which, to me, sounds like a legislative or administrative business from hell. It’s like, “You got to be kidding?”

Jim: I know this is Skywriters from Roundhill [inaudible 00:58:37] Virginia.

Ken: Yes, yes, that’s the guy.

Jim: Because I’m a homemade pyrotechnics guy myself.

Ken: Oh, all right, all right.

Jim: Because I live five miles from around it.

Ken: Okay. So you may remember, at one point he had a big business association. I think he had a warehouse, and the warehouse was made of wood. And the local government came and said, “You can’t store this stuff in a wooden warehouse. You need this, this and this.” And it was a much bigger check than he had the ability to write.

Ken: And he told his customers, “Guys, I’m in a jam.” And so he offered some crazy deal, “Give me $1,000 and I’ll give you $2,000 worth of stuff later.” And because he had treated them so well, and because he been central to their fun, the money flowed. He got all the money he needed, he bought new land, he built a new warehouse, everything was fine.

Ken: So you could do things like that when you treat your customers well. The funny thing, or weird thing, or thing that seems to contradict this is there seem to be all these big businesses that … I guess you reach a certain size, and a certain infiltration into society, you’re so in everybody’s business that they can’t get rid of you.

Ken: Because I don’t see that happening on the big business side. I see kind of the opposite happening. They start out good … Thinking of Google, I’m thinking of Facebook, and AOL to a degree. They reshuffled the cards after they brought everybody on board.

Ken: I’ll never forget, AOL had a model, it was you paid by the minute. And so AOL didn’t have the resources to create content to keep people on the site, so they recruited lots and lots of content experts that said, “Look, as long as somebody in your area, we’re going to share revenue with you.”

Ken: And that was a great model. It brought a lot of people in, a lot of people made money, it was wonderful. And then AOL said, “Hey, this guy’s making a lot of money with that content site, we can hire somebody for a fraction of that and keep all the money.” So they brought all these content producers in, and then they booted them off. And I understand business is business, but I don’t, you know.

Jim: I actually invented that business.

Ken: Oh really?

Jim: Yep. I was on the source, it was called user publishing. And the source was tiny, we had several tens of thousands of customers, and it was by the minute. This had been 1982 I think. And I identified some people that had their own kind of prototype blogs that ran on our software, and I went out to six of them who I thought were the most interesting.

Jim: And I cut a deal to pay them 17 and a half percent of the revenue they generated as a royalty. And so that was actually the beginning of that whole business model. And before I launched it, I got a moral commitment from the president and the CEO that they would never do what AOL later did, which was to try to cut out these guys by doing it in-house.

Ken: Oh, great.

Jim: Greg. I could see that hazard even then, even when the stakes [inaudible 01:01:40] when these guys were lucky to get checks for 500 bucks a month. But I’ll tell, you 500 bucks real money in 1982 be the equivalent about $1,500 a month now. It was life changing for these people, they long thought that it was a great deal for them.

Ken: Yeah. And to do something you love and to … How much better can it be? And sometimes I don’t understand certain things like some of the things that Google does, for example. They make all their money from pretty much straight advertising, like without any super surveillance. And yet, they get involved in all these extra curricular surveillance activities. And I don’t know, I just-

Jim: Well they’re doing the surveillance. I mean, why do you think they give you Gmail for free? So they can read your Gmail, that’s why they gave it to you for free.

Ken: Which is why I never used Gmail. I thought this is appalling. I don’t anyone, even a machine to read my email. But their logic was, “Well, if he’s talking about fireworks, we’ll show him a fireworks ad.”

Ken: There’s a logic to that when you’re doing searching, or when you’re on somebody’s website, and they’ve made room for Google ads. Again, if it’s a fireworks website, why not run a fireworks ad? That makes sense, but some of the other stuff they do … Yeah, I guess.

Ken: Problem is a public company has to keep growing, it has to keep grabbing more, and more, and more, and more. And I think that that’s one of the things that’s going wrong, in my opinion. Take this thing like YouTube, which I think is the wonder of the age, I think it’s one of the most amazing, miraculous things that human beings have ever created.

Ken: But now, you Google YouTube’s made a deal with the networks, and they’re sort of putting the screws to a lot of these amateur content makers to make more room for the network content. And it’s like, “Oh really?”

Ken: You see that also in healthcare, they did a, yeah, $700 million plus deal with … Is it Glaxo or one of these companies? And it just share health information and [inaudible 01:03:44]. Why do you have to go there? Well they have to go there because they’re public and they got to keep coming up with newer, and newer, and newer ways to make more and more money. But I don’t know.

Jim: Probably will see a lot more of that too. Because they were equivocal always when Brin and Page were running the place. But now those two guys are retired, I’m going to assume, unless I see strong evidence to the other side, that the suits will have taken over, and Google will be set on an economic maximization setting on its business model. I don’t think it ever was before, but I believe it will be going forward. The other one truly sad to my mind is Facebook.

Ken: Yeah.

Jim: Facebook was so profitable from so early, there was absolutely no reason they had to take that puppy public.

Ken: Right.

Jim: They could have run a small secondary market in private stock; Goldman Sachs would have been happy to do it so that people wanted to cash out who worked at Facebook they could. But Zuck could have done what he said he wanted to do, which was to change the world in a good way, by bringing us all together. But instead, he got in the business of hijacking our attention to sell us to advertisers because he had to-

Ken: Yep, yep.

Jim: To keep that price up. They’re never … I mean, he would have made a personal fortune greater than her or any of his descendants could ever possibly spend, and his most of his top employees too. But somebody sold him on the idea of going public, and then the whole goddamn thing became a shit show.

Ken: Yeah. And these handful of companies, Facebook one of them, has corralled a huge portion of internet traffic. And the thing that I was hoping wouldn’t happen is happening. What I hoped was the internet was going to remain this quirky, very specialized, whatever your interests are, you go out and find them, and plug in, and have at it. And small producers would have a chance to thrive, and we’ve got the hijacking of attention by a few big players.

Jim: And here [inaudible 01:05:44] even more weird. I’m curious if you’ve seen this, I’d love to know if you’ve seen the same pattern. Because of their super powerful network effects … And Google and Facebook now own about 70% of all internet advertising, in dollars at least.

Ken: Mm-hmm (affirmative).

Jim: But because they’re so dominant, their ads are actually not very obnoxious. They don’t pop out at you, and flash, and all this sort of shit.

Ken: Mm-hmm (affirmative).

Jim: And so, oddly enough, the fact they have these network effects have allowed them not to be quite as abusive of the direct eyeballs as all these other people. Even now quite prestigious newspapers and magazines, the fucking Guardian, these pop up ads, these invisible links that pop up and take you places you don’t want to go.

Jim: Because these guys are so dominant due to their network effects, everybody else is forced to use the most obnoxious, the most crazed, the most extreme attention grabbing tracks. And [inaudible 01:06:36] accelerate actually because these guys are dying on the vine, and so they’re willing to try anything; at least that so it appears.

Ken: Yeah. And I’ve been watching that for a long time, and that’s going to continue.

Jim: Yeah. It is interesting. And the only thing that I remember reading Chris Anderson’s book, Free, when it came out way back yonder. In fact, I’m going to look up when that book came up. Was a great deep book which convinced me he was right. Free: The Future of a Radical Price, by Chris Anderson. Book was published in 2007, 2008; something like that.

Jim: Where he basically said that, “For a whole bunch of good, psychological, cognitive reasons, free will be paid every time, even if the pain is tiny.” But it seems to me that that insight, which everybody has rushed to, is what has destroyed the internet.

Ken: Right.

Jim: Because now all they have to build their business model around is attention hijacking, and selling ads. For the longest time, as you pointed out, AOL got almost all of its revenue from its hourly fees. In the bulletin board world, it was typically a yearly subscription.

Jim: I had a VBS … In fact, it was the first VBS or visual basic programmers. And I charge $99 a year, and I had a deal with Microsoft to put my ad in the first 200,000 visual basic compilers. And I love to show how the world has changed in scale.

Jim: This was 1992, cut a deal with Microsoft to put my little one tiny three by five inch glossy piece of paper in every visual basic compiler; 250,000 of them. How much do you think Microsoft charged me for that?

Ken: Okay, just going to guess CPM of 10 bucks? So that’d be $25.

Jim: Put this in front of graduate students, and have had estimates of a million. $25,000 is getting closer to the right number; $4,000.

Ken: Oh wow, nice.

Jim: That business worked great, right? Yeah it was an unbelievable little cash cow. Basically just prowl the world looking for free software, free coding, bits and pieces in articles and stuff. And get permission to put them on mine, and all you can eat 99 bucks. People who are doing visual painting professionally thought it was a greatest deal in the world.

Jim: But anyway, I guess my point is, it seems to me that it was the turn to free around 2007 that has led to the internet becoming much less clear on whether it’s a net good or a net bad for society. And, unfortunately, it’s not all clear to me there’s any way back.

Ken: Yeah, that’s interesting. Our model has always … I mean, there is this reality that the advertising, and the thing that catches people’s attention and brings you in, is free. Even in the old media, you read articles, publicity articles about a product; that content’s free. But it would lead you to a purchase, it would point you to a purchase.

Ken: And that’s always been my model. For instance, if you’re an information marketer, you’ve got something of value to a group of people. Give away all kinds of free good stuff, but have other things like online courses, or live conferences, or consulting.

Ken: Using Ryan Holiday as an example, he’s selling medallions believe it or not, which is fascinating to me with important inscriptions from the great stoic philosophers on them to his mailing list. I assume he’s doing it because it works, and it may work very well, so you can have both.

Ken: Well let me give you … This example might really be helpful for people. The Superbowl, you can watch the Super Bowl at home, essentially, for free; I mean, you’re not paying the NFL anything. You got your cheese doodles and whatever else you got, and your beer, and you’re watching the game, and it’s free.

Ken: Or you could get in the car and drive to a place that’s been a bar, sports bar that’s been licensed to show the game. Now you got to buy some drinks, so you’ve got to spend a little money, you got to burn some gas.

Ken: You could also go to the game itself, and maybe you don’t have a whole lot of money, so you’re sitting way up in the bleachers. Okay, now you’ve got some money, so now you’ve got a good seat, maybe down on the 50 yard line. Now you’ve got a humongous amount of money, and you’re buying a sky box with butlers, and caviar, and champagne and all that. Is the game any different? It’s the same game.

Jim: Exactly. Oh because [inaudible 01:11:13] following better [inaudible 01:11:13].

Ken: It’s true, it’s true. But essentially, it’s the same game. But within any marketplace, there’ll be people that want to consume it differently. They’re not satisfied with sitting at home, they want to go where the action is at the local bar.

Ken: Or they’re ambitious, and they’re not satisfied watching it on TV, they want to be at the Super Bowl. Or they’ve got the resources, and they’ve got a business reason to buy a sky box, and bring all their big hitter clients, and reward them with a Super Bowl experience.

Ken: So you can take the same thing and parse it at different price points for people who want, and demand, different levels of access. And I think people that want to make money online need to think about that. Everything doesn’t have to be free, that’s the lazy way out. I mean, as you point out, it’s the race to the bottom. And what kind of business says “Everything’s free?”

Ken: But free things to bring people in, that makes sense. Remember Mrs. Fields Cookies? They were going broke, and then Mrs. Fields went out … Or I guess her name wasn’t really Mrs. Fields. But she went out with a tray of cookies in front of the store and started giving them out out of desperation. And that turned out to be the thing that turned the tide for that store. And then it became this big chain of stores; I don’t know what happened to them. But-

Jim: Here’s a little secret, but you may not know how they ramped that up. When they go into a shopping mall, they have an agreement with the shopping mall to allow the Mrs. Fields to blow the smell from the cooking area through the shopping mall.

Ken: There you go. And they probably have specialized chemical canisters that are even better than the smell of the ovens. Who knows? But yeah-

Jim: Yeah [inaudible 01:12:52]. I don’t know but it would certainly be a classic race to the bottom. Well, it turns out it’s easier to descend big [inaudible 01:13:00] tanks [inaudible 01:13:03] better than real chocolate chip cookies to flow out into the … Put some pheromones in there grown from fingernail tissue of Marilyn Monroe or something.

Ken: There you go, there you go. I mean, and that’s kind of a model for what’s happened to the internet. We had good cookies, they smelled good naturally, everybody was happy, and now people are bringing in tanks of synthesized cookie formula that was developed by mad scientists for maximum addiction.

Ken: We haven’t even gotten into the addiction, the deliberate creating of addictive responses on the internet. But that’s kind of a model for what’s happened and you’re right, how do we go back? I don’t know.

Jim: It’s going to be work. I spent a fair amount of time thinking about that. Here’s one little data point … Just going to throw this out to all the wannabe entrepreneurs out there who are thinking about, “How can I do something really significant for the world?” I’ve been tracking Facebook’s revenue per user for quite a long time, and it’s surprisingly low.

Ken: Mm-hmm (affirmative).

Jim: All the revenue Facebook gets has been remarkably consistent; about a $1.90 to $2 a month per active subscriber.

Ken: Mm-hmm (affirmative).

Jim: $2.

Ken: Mm-hmm (affirmative).

Jim: Right?

Ken: Mm-hmm (affirmative).

Jim: So in theory, if Facebook could get everybody to go to a paid model, $2. And to your point, there’s always a hierarchy of experience versus price. And so there ought to be a hell of a lot of room above the $2.

Jim: So imagine a specialized Facebook for good faith, honest, and high quality discourse. Could that be worth $20 a month? Might be 10 times. But to your point about the Super Bowl, compare the free super bowl to the 100,000, or maybe it’s $1 million luxury box Super Bowl; same product, but much higher price.

Ken: Yeah.

Jim: Because the costs of deliver Facebook have to be clearly less than $2 a month; probably more like a dollar. That means that there’s a nice gross margin for a more bespoke, more ethical, wonderful experience that is not all about using cutting edge cognitive psychology to make you addicted to that little red circle up at the top of the Facebook page.

Ken: Right. And then sell your personal data to Merck and J.P. Morgan.

Jim: [inaudible 01:15:23] million people, which is less than a thousand on Facebook selling at 20 bucks a month. Hey guys, that’s $240 million a year, probably 90% gross margin business; do the math, a business well-worth building.

Ken: Yeah. Why not? Why not? I just wonder if they’re just so enamored of this, “We’re going to grab all their psychographic information and sell it 10 million different ways.” And they just can’t let go. Sort of like that old story of the monkey puts his fist in the jar to grab … I don’t know what he was grabbing, a cookie we’ll say. But once he closed his fist around the cookie, his fist was too big to get out of the jar, but he couldn’t let go of that cookie, so he couldn’t get his hand out of the jar.

Ken: Which leads to this interesting point. At some point, Google and Facebook are going to start being valued by Wall Street as publishers. Right they’re getting still a lot of lift from the fact that they’re growing fast, and they’re spinning off lots of revenue; and it’s the growth that’s the thing.

Ken: But at certain point, the growth is going to slow down. A\and then Wall Street’s going to go, “Well, you guys are kind of like Life Magazine. You’ve got eyeballs, and you make a certain amount of money from them, and we don’t value publishers at the way we valuing you super high tech guys. So maybe we’re going to start valuing you as just this regular old publisher, because you’re really in the eyeballs for dollars business.”

Ken: Whereas all these years, they’ve been in the fast growth, taking over the world business, but that will reach a limit at a certain point. Then their evaluation stagnates, or goes down. And then, all of a sudden, you can’t keep all those engineers as easily as you could before when the stock price was doubling and tripling constantly. I’ve heard that analysis from Wall Street people. I don’t know if it’s going to play out, but there’s a certain logic to it.

Jim: There is. Another kicker that may actually accelerate it, which is because the margins are so high, and it’s all advertising, should direct response marketing drop significantly during the next recession, you can see an explosive decompression in the profitability of those companies.

Jim: They have relatively high fixed costs now, particularly now they both want to police the world, which is a [inaudible 01:17:45] piss out of me. But imagine that all the random shit that’s advertised on Facebook and Google, the demand for that’s going to go down a lot if we’re in a really serious recession. And truth of the matter is this dominant Facebook, Google world did not exist really in the last recession.

Ken: Mm-hmm (affirmative).

Jim: And very interesting to see what happens when the shit inevitably hits the financial and economic fan here in the months and/or years ahead. Whether it will be a kind of reverse ratchet as their revenues drive down, their marginal revenues where all their profits are, they’ve built up this cost base. And growth slows, and so then you get kind of valuations like a crappy publishing property like magazines in their later years. Or amazing Business Week, one of the great properties of all time when I was in my business prime in the 90s, was sold to Bloomberg for $1 million.

Ken: I remember that, what a tragedy.

Jim: Yeah and Newsweek, I believe was sold for a dollar to Meredith.

Ken: Unbelievable. And if you told somebody that in the 80s or early 90s that that was going to happen, they would have said, “Impossible.”

Jim: Yeah. But one of my little strange little rifts was, “Damn, I wish my dad had left me a monopoly newspaper.” And dad was actually a cop, so unlikely [inaudible 01:19:01] owned a newspaper. That seemed to me like the ultimate thing to own, say in 1985, would have been a monopoly, big city newspaper; Washington Post, The New York times, LA times, something like that. But now shit, even the Washington Post was sold for relatively pennies on the dollar.

Ken: Well Warren Buffet believed that, for the longest time, that local newspapers were the ultimate moneymaker; and he was right for that time. I mean another thing about ad revenue, and this is another advantage of you and me being on the phone because we both go back so far, is the dotcom crash.

Ken: The value of a banner ad, I mean, went from gold to shit very rapidly. Those first couple of years of 2000, you could buy every banner ad in the universe for the spare change you had in your pocket. I mean, the inventory was unbelievable; it was just they couldn’t give them away.

Jim: Yeah quite [inaudible 01:19:57], almost free. In ’99 and 2000, my company Network Solutions was, we believe, the second biggest advertiser on the web.

Ken: Oh wow.

Jim: And it was crazy. Be because we were, at that point, paying good prices because that was the dotcom bubble on the way up.

Ken: Yeah.

Jim: But we were big enough that we bought an ad agency because nobody else really knew how to do this shit. We spent $10 million in building the tracking, automating, and rotational devices to keep our ads fresh. Though you’ll remember even things like Yahoo, you could only change your creative once a day.

Ken: Yeah.

Jim: Crazy. I think we spent probably $70 million in web advertising in ’99, and $200 million in 2000 which put us behind Ford; probably the only company that was spending more on internet advertising at the time.

Ken: Wow.

Jim: And I can tell you this, the shit was remarkably profitable. Because hell domain name and those days, 70 bucks for moving a few pointers in a database; pure profit.

Ken: Now there’s a margin, right?

Jim: There’s a margin [inaudible 01:20:55] people. Fortunately or unfortunately, I actually sold at the top, we sold the company on March 10th, 2000, which is as close to the top as the internet bubble as you could possibly find, and so we got the best possible price for it. But the operating environment probably got better in the years ahead as, as you said, the direct response collects became almost worth nothing there for a couple of years in the years afterwards.

Ken: Yeah, I have to admit and that’s one of the challenges of being early. You started in the early 80s, I started in there in early-ish 90s. And so by the time 2000 came along … There’s sort of a psychological landmark of 2002, it’s like, “Okay, this is the end of time.”

Ken: And it’s a weird phenomenon, but clearly the market’s grown quite a bit since 2000. And, yeah, there are things that I wished that I’d stayed with that I was doing in 2000, but I went in other directions and did other fun stuff.

Ken: But yeah, I mean the growth since 2000 has been spectacular, but there was that Death Valley period where … I mean, I went back to San Francisco even as late as 2003, and it was like a neutron bomb and hit the Bay area.

Jim: Yeah, that was one of the [inaudible 01:22:02] you could actually buy a residential real estate for a reasonable price.

Ken: Yeah, the buildings were still standing, but the people were gone.

Jim: Yeah, yeah.

Ken: Can I tell you the banner ad story because-

Jim: Go right ahead [inaudible 01:22:13].

Ken: All right so … And this, I think, this might’ve been my biggest contribution of all. So it was June of 1994, which was just, I think, a month earlier had been the 150th anniversary of the demonstration of the telegraph.

Ken: And I kind of looked at that, I said, “wow, 150 years since the telegraph, we’ve got this internet thing going on. Why don’t I put on a little meeting?” So I asked Mark Graham, big internet commercialization pioneer, who really should get a lot of credit … I think in ’93 Microtimes called him one of the 100 most important people in computing. He was called Mr. Internet in the Bay area, which gives you an idea of how central he was to helping people get with the idea of commercial internet; so I asked him to come.

Ken: I asked Mark Fleischman to come, and Mark Fleischman, believe it or not, was the first guy to declare himself a full-time freelance web producer, web designer, web maker. He’s the guy that put the Palo Alto weekly online, that was the first newspaper to put all of his content online; so he goes way back. He hung out a shingle in ’93; so I had him there.

Ken: The purpose of this meeting was to sort of brainstorm, and figure out how are we going to put a financial footing under this thing that we love, and are so excited about? So one of the guys I invited to come as an outsider was then an ad agency executive named Rick Boyce.

Ken: And Rick worked for Powell Riney, which was very super cool ad agency in San Francisco at the time. May still be, I don’t know. But in those days it was the hippest agency you could work for. And he was a very, very bright guy, and I could see that his mind really could work.

Ken: So I asked him to come to the meeting. So we talked about all these different possible models for the … And I have it on tape, thank God. And we talked about all these different possible models for commercializing the internet, and we really weren’t coming up with anything.

Ken: So on the break Mark Graham and I were talking with Rick. And Rick had no exposure to the web at all; this was June ’94; there weren’t a lot of people on the web. And we said, “Look Rick, you can put a little square on the page, right? They click on the little square, it takes them to a big square, and you can count how many people see the ad, and how many people click on the ad. You can get a sense of how effective an ad is.”

Ken: Two months later, he quit Powell Riney, he went to work for Hotwired, which was Wired’s online magazine as the head of business development. And Hotwired was the first business, as far as I know, that put a flag in the ground and said, “We are going to be a serious commercial advertising supported website.” And Rick Boyce was the first person to sell banner ads on a commercial corporate scale, an industrial scale. So I was there, we had-

Jim: Great.

Ken: And I want to say this to folks. We didn’t know what we were doing when we were doing it, we were just interested. And we had a problem that fascinated us, and we were trying to solve it, and we didn’t know what we were doing. But we thought, “What the hell? We’re young, we have the little extra energy, why don’t we just …”

Ken: I had a whole other business, I was running the real estate finance conference business, and that was a full-time thing, and I was doing all this other internet stuff on the side. So I to encourage young people, it doesn’t have to be … Opportunities are not going to be presented to you completely formed, and there’s not going to be this clear step one, step two, step three.

Ken: I mean, Zuckerberg didn’t know that Facebook was going to be Facebook when he was putting his college classmates on the web. Wozniak didn’t know Apple was going to be Apple when he calculated that there were 50,000 serious techno geek hobbyists in the world that would spend money on chips.

Ken: If you love something, go for it, you don’t know where it’s going to take you. And so I just want to make sure I convey that message. It’s not like there was a grand scheme and everybody knew what they were doing from day one. Quite the opposite.

Jim: Well, I think we’re going to wrap up on that note. This has been so much fun, Ken, I am so glad that we got connected, and I was able to do this episode.

Ken: Well thank you. And I thank our mutual friend, Steve Okey, for introducing us.

Jim: Indeed.

Production services and audio editing by Jared Janes Consulting. Music by Tom Muller at