Esther Dyson wrote about a really interesting area of the advertising market in an article for The Wall Street Journal.

She’s talking about user behavior data arbiters, companies that capture what users are doing on the Internet through ISPs and sell that data to advertisers.

These companies put tracking software between the ISP and a user’s HTTP requests. They then build dynamic and anonymous profiles for each user. NebuAd, Project Rialto, Phorm, Frontporch and Adzilla are among several companies competing for space on ISPs’ servers. And there’s no shortage of ad networks who will make use of that data to improve performance.

Esther gives an example:

“Take user number 12345, who was searching for cars yesterday, and show him a Porche ad. It doesn’t matter if he’s on Yahoo! or MySpace today — he’s the same number as yesterday. As an advertiser, would you prefer to reach someone reading a car review featured on Yahoo! or someone who visited two car-dealer sites yesterday?”

Behavioral and demographic targeting is going to become increasingly important this year as marketers shift budgets away from blanket branding campaigns toward direct response marketing. Over the next few years advertisers plan to spend more on behavioral, search, geographic, and demographic targeting, in that order, according to Forrester. AdWeek has been following this trend:

“According to the Forrester Research report, marketer moves into areas like word of mouth, blogging and social networking will withstand tightened budgets. In contrast, marketers are likely to decrease spending in traditional media and even online vehicles geared to building brand awareness.”

We tried behavioral targeting campaigns back at InfoWorld.com with mild success using Tacoda. The main problem was traffic volume. Though performance was better than broad content-targeted campaigns, the target segments were too small to sell in meaningful ways. The idea of an open exchange for auctioning inventory might have helped, but at the time we had to sell what we called “laser targeting” in packages that started to look more like machine gun fire.

This “edge targeting” market, for lack of a better term, is very compelling. It captures data from a user’s entire online experience rather than just one web site. When you know what a person is doing right now you can make much more intelligent assumptions about their intent and, therefore, the kinds of things they might be more interested in seeing.

It’s important to emphasize that edge targeting doesn’t need to know anything personally identifiable about a person. ISP’s legally can’t watch what known individuals are doing online, and they can’t share anything they know about a person with an advertiser. AdWeek discusses the issue of advertising data optimization in a report title “The New Gold Standard“:

“As it stands now, consumers don’t have much control over their information. Direct marketing firms routinely buy and sell personal data offline, and online, ad networks, search engines and advertisers collect reams of information such as purchasing behavior and Web usage. Google, for instance, keeps consumers’ search histories for up to two years, not allowing them the option of erasing it.

Legalities, however, preclude ad networks from collecting personally identifiable information such as names and addresses. Ad networks also allow users to opt out of being tracked.”

Though a person is only identified as a number in edge targeting, that number is showing very specific intent. That intent, if profiled properly, is significantly more accurate than a single search query at a search engine.

I suspect this is going to be a very important space to watch in the coming years.

I’ve been looking for a way to share playlists on my blog and elsewhere online for a long time. It’s been surprisingly hard to find a really convenient way to do it.

DRM and industry lockdown have been a big part of that, but there have also been too few technical ways to point to music files that are already publicly available. There are tons of legal MP3’s on the Internet that reside at readable URLs today.

Lucas Gonze and his team at Yahoo! solved this problem. They launched a source-agnostic embeddable media player. You can read more about it on YDN.

It’s fantastically simple. All you do is paste this reference to Yahoo!’s media player javascript code anywhere on your web page (I added it at the bottom of my blog templates):

<script type=”text/javascript” src=”http://mediaplayer.yahoo.com/js”></script>

Then you just add an HTML link somewhere on your web page to any MP3 file you want to see in your playlist.

That’s it. You’re already done. The link you just made will now include a small play button in front of it, and a mini media player will appear in the browser.

Here’s a short playlist I quickly put together to show how it works. The 4th track here is particularly relevant to my life:

Cut Chemist - The Garden
Young Einstein (Ugly Duckling) - Handcuts Soul Mix
They Might Be Giants- Birdhouse in Your Soul
LCD Soundsystem - Losing My Edge

The code for that playlist looks like this:

<a href=”http://download.wbr.com/cutchemist/TheGarden.mp3″> Cut Chemist - The Garden </a>
<a href=”http://www.uglyduckling.us/music/HandCutsSoulMix.mp3″> Young Einstein (Ugly Duckling) - Handcuts Soul Mix </a>
<a href=”http://midwesternhousewives.com/mix/The%20Might%20Be%20Giants-%20Birdhouse%20in%20Your%20Soul.mp3″> They Might Be Giants- Birdhouse in Your Soul </a>
<a href=”http://www.personal.psu.edu/users/s/m/smk291/muchies/LCD%20Soundsystem%20-%20Losing%20My%20Edge.mp3″> LCD Soundsystem - Losing My Edge </a>

They’ve included some other nice things in the code that give you some flexibility. You can create a shareable playlist file, and you can add cover art, for example.

What I like most, probably, is the architecture of the solution. Anyone who already links to MP3 files can just add the music player javascript code to their page templates, and it will just work immediately. You don’t have to force fit a heavily branded HTML badge into your web page. And since the links are all standard HTML href’s, the content of the playlist is search engine friendly.

It’s the first time I’ve seen a media player so closely aligned with the way the Internet works.

Lucas posts about the need to unlock how media files are referenced. He wants to take the complexity out of distribution and reduce the concept of music sharing and discoverability to the Internet’s roots with URLs as identifiers:

“Almost all online music businesses right now are in the distribution business, even if they see other functions like discovery or social connection as their main value, because they have no way to connect their discovery or social connection features with a reliable provisioning service from a third party. But provisioning is a commodity service which doesn’t give anybody an edge. They don’t want to import playlists from third parties because *that’s* where they are adding value.

Exporting playlists for others to provision, though, is a different story, and it makes much more sense from a business perspective. Let somebody else deal with provisioning. This is what it would mean for somebody like Launchcast or Pandora to publish XSPF with portable song identifiers that could be resolved by companies that specialize in provisioning.”

It seems Lucas is thinking about how to get music flowing around the Internet with the same efficiency that text has enjoyed. Very smart.

I’m intrigued by the various ways people view ‘value’. There seem to be 2 camps: 1) people who view the world in terms of competition for finite resources and 2) people who see ways to create new forms of value and to grow the entire pie.

Umair Haque talks about choices companies make that push them into one of those 2 camps. He often argues that the market needs more builders than winners. He clarifies his position in his post The Economics of Evil:

“When you’re evil, your ability to co-create value implodes: because you make moves which are focused on shifting costs and extracting value, rather than creating it. …when you’re evil, the only game you want to - or can play - is domination.”

I really like the idea that the future of the media business is in the way we build value for all constituencies rather than the way we extract value from various parts of a system. It’s not about how you secure marketshare, control distribution, mitigate risk or reduce costs. It’s about how you enable the creation of value for all.

He goes on to explain how media companies often make the mistake of focusing on data ownership:

“Data isn’t the value. In fact, data’s a commodity…What is valuable are the things that create data: markets, networks, and communities.

Google isn’t revolutionizing media because it “owns the data”. Rather, it’s because Google uses markets and networks to massively amplify the flow of data relative to competitors.”

I would add that it’s not just the creation of valuable data that matters but also in the way people interface with existing data. Scott Karp’s excellent post on the guidelines for transforming media companies shares a similar view:

“The most successful media companies will be those that learn to how build networks and harness network effects. This requires a mindset that completely contradicts traditional media business practices. Remember, Google doesn’t own the web. It doesn’t control the web. Google harnesses the power of the web by analyzing how websites link to each other.”

What is it that makes my favorite online services so compelling? I’m talking about the whole family of services that includes Dopplr, Wesabe, Twitter, Flickr, and del.icio.us among others.

I find it interesting that people don’t generally refer to any of these as “web sites”. They are “services”.

I was fortunate enough to spend some time with Dopplr’s Matt Biddulph and Matt Jones last week while in London where they described the architecture of what they’ve built in terms of connected data keys. The job of Dopplr, Mr. Jones said, was to “surface coincidence”.

I think that term slipped out accidentally, but I love it. What does it mean to “surface coincidence”?

It starts by enabling people to manufacture the circumstances by which coincidence becomes at least meaningful if not actually useful. Or, as Jon Udell put it years ago now when comparing Internet data signals to cellular biology:

“It looks like serendipity, and in a way it is, but it’s manufactured serendipity.”

All these services allow me to manage fragments of my life without requiring burdensome tasks. They all let me take my data wherever I want. They all enhance my data by connecting it to more data. They all make my data relevant in the context of a larger community.

When my life fragments are managed by an intelligent service, then that service can make observations about my data on my behalf.

Dopplr can show me when a distant friend will be near and vice versa. Twitter can show me what my friends are doing right now. Wesabe can show me what others have learned about saving money at the places where I spend my money. Among many other things Flickr can show me how to look differently at the things I see when I take photos. And del.icio.us can show me things that my friends are reading every day.

There are many many behaviors both implicit and explicit that could be managed using this formula or what is starting to look like a successful formula, anyhow. Someone could capture, manage and enhance the things that I find funny, the things I hate, the things at home I’m trying to get rid of, the things I accomplished at work today, the political issues I support, etc.

But just collecting, managing and enhancing my life fragments isn’t enough. And I think what Matt Jones said is a really important part of how you make data come to life.

You can make information accessible and even fun. You can make the vast pool feel manageable and usable. You can make people feel connected.

And when you can create meaning in people’s lives, you create deep loyalty. That loyalty can be the foundation of larger businesses powered by advertising or subscriptions or affiliate networks or whatever.

The result of surfacing coincidence is a meaningful action. And those actions are where business value is created.

Wikipedia defines coincidence as follows:

“Coincidence is the noteworthy alignment of two or more events or circumstances without obvious causal connection.”

This is, of course, similar and related to the definition of serendipity:

“Serendipity is the effect by which one accidentally discovers something fortunate, especially while looking for something else entirely.”

You might say that this is a criteria against which any new online service should be measured. Though it’s probably so core to getting things right that every other consideration in building a new online service needs to support it.

It’s probably THE criteria.

The recent blog frenzy over hyperlocal media inspired me to have a look at Outside.in again.

It’s not just the high profile backers and the intense competitive set that make Outside.in worth a second look. There’s something very compelling in the way they are connecting data that seems like it matters.

My initial thought when it launched was that this idea had been done before too many times already. Topix.net appeared to be a dominant player in the local news space, not to mention similar but different kinds of local efforts at startups like Yelp and amongst all the big dotcoms.

And even from their strong position, Topix’s location-based news media aggregaton model was kind of, I don’t know, uninteresting. I’m not impressed with local media coverage these days, in general, so why would an aggregator of mediocre coverage be any more interesting than what I discover through my RSS reader?

But I think Outside.in starts to give some insight into how local media could be done right…how it could be more interesting and, more importantly, useful.

The light triggered for me when I read Jon Udell’s post on “the data finds the data”. He explains how data can be a vector through which otherwise unrelated people meet eachother, a theme that continues to resonate for me.

Media brands have traditionally been good at connecting the masses to eachother and to marketers. But the expectation of how directly people feel connected to other individuals by the media they share has changed.

Whereas the brand once provided a vector for connections, data has become the vehicle for people to meet people now. Zip code, for example, enables people to find people. So does marital status, date and time, school, music taste, work history. There are tons of data points that enable direct human-to-human discovery and interaction in ways that media brands could only accomplish in abstract ways in the past.

URLs can enable connections, too. Jon goes on to explain:

“On June 17 I bookmarked this item from Mike Caulfield… On June 19 I noticed that Jim Groom had responded to Mike’s post. Ten days later I noticed that Mike had become Jim’s new favorite blogger.

I don’t know whether Jim subscribes to my bookmark feed or not, but if he does, that would be the likely vector for this nice bit of manufactured serendipity. I’d been wanting to introduce Mike at KSC to Jim (and his innovative team) at UMW. It would be delightful to have accomplished that introduction by simply publishing a bookmark.”

Now, Outside.in allows me to post URLs much like one would do in Newsvine or Digg any number of other collaborative citizen media services. But Outside.in leverages the zip code data point as the topical vector rather than a set of predetermined one-size-fits-all categories. It then allows miscellaneous tagging to be the subservient navigational pivot.

Suddenly, I feel like I can have a real impact on the site if I submit something. If there’s anything near a critical mass of people in the 94107 zip code on Outside.in then it’s likely my neighbors will be influenced by my posts.

Fred Wilson of Union Square Ventures explains:

“They’ve built a platform that placebloggers can submit their content to. Their platform “tags” that content with a geocode — an address, zip code, or city — and that renders a new page for every location that has tagged content. If you visit outside.in/10010, you’ll find out what’s going on in the neigborhood around Union Square Ventures. If you visit outside.in/back_bay, you’ll see what’s going on in Boston’s Back Bay neighborhood.”

Again, the local online media model isn’t new. In fact, it’s old. CitySearch in the US and UpMyStreet in the UK proved years ago that a market does in fact exist in local media somehwere somehow, but the market always feels fragile and susceptible to ghost town syndrome.

Umair Haque explains why local is so hard:

“Why doesn’t Craigslist choose small towns? Because there isn’t enough liquidity in the market. Let me put that another way. In cities, there are enough buyers and sellers to make markets work - whether of used stuff, new stuff, events, etc, etc.

In smaller towns, there just isn’t enough supply or demand.”

If they commit to building essentially micro media brands based exclusively on location I suspect Outside.in will run itself into the ground spending money to establish critical mass in every neighborhood around the world.

Now that they have a nice micro media approach that seems to work they may need to start thinking about macro media. In order to reach the deep dark corners of the physical grid, they should connect people in larger contexts, too. Here’s an example of what I mean…

I’m remodeling the Potrero Hill shack we call a house right now. It’s all I talk about outside of work, actually. And I need to understand things like how to design a kitchen, ways to work through building permits, and who can supply materials and services locally for this job.

There must be kitchen design experts around the world I can learn from. Equally, I’m sure there is a guy around the corner from me who can give me some tips on local services. Will Architectural Digest or Home & Garden connect me to these different people? No. Will The San Francisco Chronicle connect us? No.

Craigslist won’t even connect us, because that site is so much about the transaction.

I need help both from people who can connect on my interest vector in addition to the more local geographic vector. Without fluid connections on both vectors, I’m no better off than I was with my handy RSS reader and my favorite search engine.

Looking at how they’ve decided to structure their data, it seems Outside.in could pull this off and connect my global affinities with my local activities pretty easily.

This post is way too long already (sorry), but it’s worth pointing out some of the other interesting things they’re doing if you care to read on.

Outside.in is also building automatic semantic links with the contributors’ own blogs. By including my zip code in a blog post, Outside.in automatically drinks up that post and adds it into the pool. They even re-tag my post with the correct geodata and offer GeoRSS feeds back out to the world.

Here are the instructions:

“Any piece of content that is tagged with a zip code will be assigned to the corresponding area within outside.in’s system. You can include the zip code as either a tag or a category, depending on your blogging platform.”

I love this.

30Boxes does something similar where I can tell it to collect my Upcoming data, and it automatically imports events as I tag them in Upcoming.

They are also recognizing local contributors and shining light on them with prominant links. I can see who the key bloggers are in my area and perhaps even get a sense of which ones matter, not just who posts the most. I’m guessing they will apply the “people who like this contributor also like this contributor” type of logic to personalize the experience for visitors at some point.

Now what gets me really excited is to think about the ad model that could happen in this environment of machine-driven semantic relationships.

If they can identify relevant blog posts from local contributors, then I’m sure they could identify local coupons from good sources of coupon feeds.

Let’s say I’m the national Ace Hardware marketing guy, and I publish a feed of coupons. I might be able to empower all my local Ace franchises and affiliates to publish their own coupons for their own areas and get highly relevant distribution on Outside.in. Or I could also run a national coupon feed with zip code tags cooked into each item.

To Umair’s point, that kind of marketing will only pay off in major metros where the markets are stronger.

To help address the inventory problem, Outside.in could then offer to sell ad inventory on their contributors’ web sites. As an Outside.in contributor, I would happily run Center Hardware coupons, my local Ace affiliate, on my blog posts that talk about my remodelling project if someone gave them to me in some automated way.

If they do something like this then they will be able to serve both the major metros and the smaller hot spots that you can never predict will grow. Plus, the incentives for the individuals in the smaller communities start feeding the wider ecosystem that lives on the Outside.in platform.

Outside.in would be pushing leverage out to the edge both in terms of participation as they already do and in terms of revenue generation, a fantastic combination of forces that few media companies have figured out, yet.

I realize there are lots of ‘what ifs’ in this assessment. The company has a lot of work to do before they breakthrough, and none of it is easy. The good news for them is that they have something pretty solid that works today despite a crowded market.

Regardless, knowing Fred Wilson, Esther Dyson, John Seely Brown and Steven Berlin Johnson are behind it, among others, no doubt they are going to be one to watch.