Q&A: Battelle talks blog roll-ups, Google, and Federated Media's future

John Battelle knows tech booms and busts. He's been at the forefront of them for nearly two decades.

In 1993, he co-founded Wired, a print magazine that set a standard in technology coverage and spawned popular sites like Hotbot and Suck in a move to build an online Condé Nast--before its time. (Condé Nast now owns Wired.) Then in 1998, he co-founded The Industry Standard, a clubby tech publication that grew much like the overvalued dot-coms it covered, and it eventually imploded with the pack.

A longtime journalist, Battelle turned his attention to the zeitgeist in 2003: Google. He wrote a book on the thriving company called "The Search," published by Portfolio Hardcover in September 2005. (Disclosure: I did some research for Battelle's book.) He created his own popular blog about the search and media industry and used that as a research and publicity tool for the book. After the experience of building a blog community and with his business hat on, he launched the Web 2.0 conferences with O'Reilly and began germinating Federated Media Publishing, a back-end deal maker for a network of well-known and independent bloggers and Web sites.

Battelle and FM, which sells and serves ads for its publishing partners for a 50 percent to 60 percent cut of the ad revenue, is once again in the vanguard of what's hot on the Internet--so-called vertical advertising and publishing networks.

CNET News.com talked to Battelle recently about raising money, the state of online publishing, and the future of Google.

Q: Vertical ad networks like Glam Media are really popular right now. Investors love them. Why do you think that is?
Battelle: Because people don't understand them and they hope things that they don't understand will pan out.

That's not very smart.
Battelle: Well, I just think they are the kind of flavor of the month, but you have to get down to where do you add value to the marketer and where do you add value to the publisher.

I think that there is definitely more value in a vertical ad network than in a horizontal ad network. So you can say look, I've got these 400 sites and they are all women's interest. Advertisers are going to probably pay a little bit more for that. I just don't think at the end of the day you can get the brand awareness and brand engagement using algorithms, putting (Interactive Advertising Bureau) banners next to content. You can get part of the way there. To get all the way there you have to have the kind of ecosystem that was the magazine business at the height of its expression, where you can really get into that and do some cool things working with the publisher, like (the equivalent of) a two-page advertising spread online.

The industry is really good at direct response advertising online. The problem with vertical ad networks is that until you have engagement, integration, and proof of that consumer awareness, you are just going to keep devolving down to direct response pricing, which is sub $5 cost per thousand (CPM) for an ad.

We want it at the kinds of CPMs that supported the magazine and the cable industry, which is above $20, $30, $40, $50 cost per thousand. Advertisers will pay that once they feel like they're getting that value for it, and once the media is created that proves that value, and it's not just the publisher's job to create that media, it's the publishers working in partnership with the marketers and that what we try to do it with them.

Briefly describe how your business is different from other publishing/ad networks?
Battelle: Our goals are that the independent media driven by passionate individuals and groups of individuals is how we make our money. (We're) helping those folks make money, helping them have access to services and deals that they couldn't otherwise. By federating together with a lot of other like sites, they get better access to terms and deals from large companies like Google or Microsoft.

The core of that is that we work with a select group of really high-quality sites that are independent; and it's in our interest to help them stay that way. Particularly last year, everyone was running around talking about how cool the idea of a roll-up was: "We'll buy a bunch of these sites and stick them together and we've got the next big media company."

I'm not certain that that strategy doesn't kill the...goose that laid the golden egg. The reason that they're so successful is because they are independent. So we want to help them have access to the things they'd have if they were purchased by Viacom or Time or Condé Nast.

Word has it you're looking to raise money and you've hired Savvian to vet offers. Given that you're already profitable and don't need the cash, what do you plan to do with the money?
Battelle: Well, I can't say specifically what we might do with any money that we might raise, should we do a fund-raising round. But I think there are an awful lot of opportunities in this emerging field and it's just good to have access to capital to execute any reasonable ideas that we might have. It's a very quickly changing market and it needs financing. I mean individual sites need financing and we want to be a good partner for all of our sites.

What do you mean individual sites need financing? You want to fund some of the sites you represent?
Battelle: I'm not saying that we'll necessary do that. I'm saying that it might not be a bad idea to be ready, should that become something that those sites are looking to do. In a fast-evolving model, it pays to have a strong balance sheet.

There was a rumor of that $100 million buyout offer, did you turn that money down?
Battelle: Let me put it this way, we're a venture-backed company, and all venture-backed companies at the end of the day are interested in one way or another in reviewing any potential offers. I can't confirm or deny what's been written there, but I can say that whoever might end up owning a company will have to really believe in FM's business model, and really understand what to do with it next and pay a price that is fair to everybody, including our publishers who have a piece in that.

So, obviously if there were such a price tendered, not that I'm confirming it, the board and I must have believed there was more value to be found elsewhere. Hypothetically.

Traditionally you've been a publisher creating the content and now you've separated from that role and are supporting the content, and I'm wondering what that says about how you feel about the value of it?
Battelle: I believe even more than ever in the value and quality of content. What I think has changed is that the creation of content, and I'm using content very broadly here to include services as well as traditional approaches to content...but I think the creation of content has decoupled in the last five years. Decoupled from the media business--I mean Viacom, Time Inc, CNET, Wired, Condé Nast--and that decoupling means that talented producers of content, for the first time have access to distribution, tools of production, and the ability to actually execute and produce their own content without having to attach themselves to traditional media businesses.

This is a reasonably new development and the reason that folks are interested in doing this is because direct access to audiences is...it's easy to get stoned on that. It's really cool. It's a very different kind of relationship between author and audience than you have in standard distribution channels--cable television or newsstand distribution. The consumption of that kind of content is what I call conversational consumption, it's back and forth, it's participatory.

This new form definitely exists now and it exists independent of the traditional media business model. FM is basically an attempt to become that new ecosystem. What we found is 150 sites that we work with and these are people who want to be in charge of their own destiny.

It's that publishing partner, that media business partner that sort of re-couples with the content without controlling it or dictating it or owning the intellectual property, which is a much better deal than going to have to work for Viacom if you're the kind of person who wants to control your destiny and own your intellectual property. So it is a kind of new business model, but it borrows heavily from a lot of other business models: book publishing, travel agents, advertising Web networks.

As a journalist, it seems to me like it can get sticky when you're running your own Web site, acting as business development lead, marketing director and so on, and also reporting and developing content for your site. The traditional wall between editorial and advertising can fall down in that scenario. And that became a problem with one of Federated's conversational marketing campaigns with bloggers in your stable--in which Om Malik and Venturebeat were promoting Microsoft products in an ad and then pulled out. What's your thinking on maintaining those traditional editorial boundaries?
Battelle: I disagree that they were "promoting" products. They were not. They were answering a question that Microsoft posed. They did not write about Microsoft's products, they participated in a conversation, though some pointed out, and I agree, that there was a perception of what you suggested.

In any case, it's true, when journalists are running their own shop, these issues will come up, and Om decided that, on reflection, he should not have been part of that campaign. But we can't paint the entire world of conversational media with one bad example. The folks you mentioned have brought in business managers, and we all learned a lot from the example you cite.

I think if you call yourself a traditional journalist, you should maintain "traditional" boundaries. But there's a lot more to discuss about whether in "traditional" media companies those boundaries are any stronger than the trust and transparency one finds in a true dialogue with readers. Publishers exist to moderate the back and forth between commercial interests and a journalist's work. FM does the same, working with either journalists or their business managers. With conversational media, there's also a very strong reader element. The key is to maintain transparency. And to learn from when things go awry. It's early yet.

How do you think a publisher like The New York Times should respond to this new market?
By embracing it as they have. They have like 50 blogs now, and they bought About.com.

How healthy is the online advertising business from your perspective? Any signs of slowdown because of the economy?
Battelle: Not yet, from what we can see, but I wouldn't predict that we won't see signs. It's pretty rough out there right now!

Since you wrote your search book, are you surprised by how the landscape has changed, or not changed?
Battelle: Except that Google has sort of duped me and continued to completely dominate it. I thought that Microsoft would actually put up a more credible fight. But it was almost game over by the time that book came out and now the next challenge...is to create engaging media that works for brand advertisers. Google isn't in anyway setup to win that. I think Yahoo was in a much better position, but now it's wrapped around the axial of ad networks and thinking that that's where the answer is. But I understand that, because they have huge scale and so they can just increase their (ad pricing CPMs) from 65 cents to a buck, their margins go up by God knows how much, but enough to make everyone look like geniuses.

I don't think at the end of the day that's enough, you have to figure out this brand engagement and awareness thing. And you can't just do it by algorithmically matching banners and extra content. You've got to come up with something else. So the value that I hope we created with Federated Media.

Do you think Google is losing ground? The company really took a hit from recent ComScore numbers, which were eventually downplayed by the research firm.
Battelle: I think there is a high probability that next quarter's numbers or the quarter after will put the stock back on track. Google did some things that probably they knew they were going to take a near-term hit. I think the market is just waiting for good news and they'll be more than happy to bid Google right back up

I don't think they're loosing ground (but) the whole market might be slowing down. The real question around Google is what's the second act after search?

Where Google has a new nut to crack is in brand/display advertising and I think what they're starting to recognize is that in order to do that you need engaging media that is driven by communities. That is something that they have not been historically interested in, but I think they're starting to become quite interested in it because they realize that the brand advertising market, the top-end of the funnel so to speak--awareness creation, engagement, brand building--it is very, very large market. The vast majority of it is still being spent offline.

That is one answer, but there are others including office suite applications or telecommunications. They're boiling several oceans at once right here. Which one becomes the second act is anyone's guess, but branded advertising is certainly one of them and I think there are a lot of people at that company who are very smart, who understand branded advertising, who would love to see a suite of products and services from Google that could scale into that, but it would mean a shift in the DNA of the company and that's a great, great story actually. So I mean, a company that's 10 years old changing its DNA would be pretty interesting.

What kind of shift in its DNA are you talking about?
Battelle: Being a publisher. You've got to be a publisher if you want to be in the branded advertising space. You've got to act like a publisher and you've got to think like a publisher. And that's not what they're good at.

Editors' note, March 25, 2:10 PM PDT: Due to an editing error, when this story was initially published, a promo on the News.com home page inadvertently used a photo of John Battelle without attribution to the photographer, James Duncan Davidson. That photo no longer appears on the News.com site.