“There’s something magical about flipping through the pages of a classy, high-gloss magazine”, says Yaron Galai. “To pull it out from the nylon wrapping, start browsing through its pages, move from article to article and even from advertisement to article. This ‘magic’ of browsing through pages has yet to be cracked and replicated online. That’s what Outbrain is trying to do, and I see myself as a promoter of stories.”
When Galai puts it like that, it really does sound almost magical. “Promoter of stories” is a little like “storyteller” and flipping through a particularly good glossy magazine is indeed a sensory experience that cultivates thought and taste. Outbrain, the company he founded 7 years ago does indeed promote stories, but mainly in order to promote products. As the leading content discovery platform in the world, Outbrain has essentially transformed the way we browse through articles online, recommending articles and also brands in between. Yaron Galai essentially invented the world of native advertising – an industry that doubles in size every year and in 2015 will generate an estimated $1 billion. Outbrain, which managed advertising budgets of $250 million this year, will be embarking soon on an IPO estimated to be worth $1 billion and it leads an entire niche that was created to sell products to online users fed up with advertising pop-ups and other sales promotion tactics.
You may not have heard of Outbrain, but you know what its platform does: When you browse through a website and read an article that interests you, it’s the recommendations of “other articles that may interest you” that you notice either below or beside the article (somewhere prominent). Some constitute proper journalistic content while some fall into the grey area somewhere between editorial content and advertising. For example, a colorful article about a trip to a huge coffee plantation in Africa sounds interesting, right? Well it’s certainly more interesting than an ad for a coffee brand that would have previously been flickering at you alongside the browser window. The coffee brand has come to understand that you don’t “see” these ads, and it has found a different way to reach you and tell you about the wonders of its products by replacing its annoyingly flickering ad with an interesting piece of content. But in fact it’s not the coffee brand that found the way, Yaron Galai did. Marketing-based content has existed since the early days of journalism, and the internet searched for years for a way to shove it down the throats of online users – a relatively critical audience – without them realizing it. And then Galai came along.
“I invented this market” he told Calcalist in his first in-depth (and rare) interview. At 43, this serial entrepreneur – a native of Jerusalem who has been living in New York for over a decade – is proud of the fact that he’s the one who caused online readers to start skipping from recommendation to recommendation, often without realizing that this “skipping route” was not only carefully and meticulously planned but also monetized. “I turned this market from a market of millions into a market of hundreds of millions and I’m sure that it will still become a market of billions”, says Galai.
But of course the minute that users began to skip (from article to article) and the money began rolling in, competitors also began rolling into this flourishing market. Today, giants like Yahoo and AOL battle it out in the content-discovery arena alongside smaller and more specialized companies. Some focus on Native Advertising and others on pure content recommendations whose purpose is to prolong the user’s visit in a particular website. Galai allows himself to politely laud the competition and at the same time to sting his competitors. “When people want to copy you it’s a sign that you’re doing something very right”, he says. “Competition is a great thing and it’s a compliment that so many players both big and small decide to mimic us. The fact that other VC-funded entrepreneurs have entered this space alongside large companies like Yahoo, IAC, AOL and ad agencies like WPP is a massive compliment, but unfortunately what we’re seeing is a competition around pricing, and squeezing more out of a lemon that’s already been squeezed isn’t particularly clever. The industry’s leading players will be determined based on technological superiority.”
In other words, he doesn’t intend to relinquish his lead easily: “We acquired 3 companies, raised the largest sum of money in the market ($100 million) and we’re investing the most in development.” Most of the development, incidentally, is done in Israel. Outbrain’s largest competitor is also an Israeli company and Yahoo’s efforts in this market are also driven from Israel. What drives Galai, who must always “win the game”, is slowly turning Israel into a Native Advertising powerhouse. Now, competitive as his is, he’s waiting for Google to understand that it too must enter the field.
Who remembers ads anyway?
Exactly 7 years ago in November 2007, Yaron Galai sold Quigo for $363 million. He was 37 at the time and he parted from a company that he founded at 26, which was also in the area of online advertising based on context (an engine that matched the display of text ads to the content of the article on the page). On the day he sold the company Galai had already signed up the first investment for his next company, Outbrain.
In 2008 in a short interview with Calcalist, Galai attempted to explain his race from company to company. “It feels like a game to me that I really want to win”, he said. “It’s like a huge puzzle with many players and pieces, and you have to build the strategies.” When asked about what need Outbrain fulfills shortly after his huge exit with Quigo, he answered: “The need to prove that my first success wasn’t the result of luck, but of something that’s really inside of me.”
A year later in 2009 – led by founders Galai and its General Manager in Israeli Ori Lahav – Outbrain launched a native advertising platform, one that everyone is meant to benefit from: Advertisers, who can successfully promote products in a more targeted and effective way; news websites that enjoy advertising revenue without scaring off readers; and online users who can now enjoy sites with less noise and more personalized content. As part of its service Outbrain also promotes genuine editorial articles that are not associated with any commercial entity right alongside sponsored content recommendations. Following on from this concept of providing a better-rounded package for website owners, users and advertisers, Outbrain also developed 50 algorithms that personalize content for the users and are easy for website owners to install.
When Galai tries to explain the crux of the logic behind the idea he talks about his presentations to potential clients – news and content websites around the world. He presents to his audience an article on test-driving a Mazda 3 and explains that this is an article that Mazda pays him to promote to readers of international finance website Bloomberg. Galai projects the article on a screen and reads it out to the audience and ends with the question: Would you consider opening an account with Bank of America? Or take out life insurance with Liberty Mutual?
“The audience looks at me suspiciously as if to say ‘Dude, you’re in the middle of a story about Mazda.’ They’re probably thinking to themselves ‘this guy forgot to take his pills’, but then I point to the ads that were on the page all along and no one noticed. It proves how blind we have become to ads. Six months from now no one will remember any ads they’ve seen but it’s quite possible that they’ll remember an article they read.”
With this insight, Galai didn’t just invent the market, he also controls it firmly. According to market estimates, Outbrain is the leading company in the native advertising industry, displaying over 190 billion monthly content recommendations to over 560 million online users in 100,000 websites including 800 premium or large news sites like BBC, CNN, and media company Condé Nast (whose brands include The New Yorker, Vogue, Vanity Fair, Wired and GQ). Google, by comparison, displays 100 billion monthly search results. In other words, more people are exposed to leads that Galai offers them than leads that they attempt to find on their own using Google. Galai’s company is quite possibly one of the primary influencers of online traffic flow in the internet today, and as a consequence also a main director of the flow of ‘perception’.
As part of its growth, the number of employees in the company has doubled over the past couple of years and now stands at about 430 staff, most of whom are in the company’s offices in Natanya, Israel. According to industry estimates Outbrain managed ad budgets totaling $250 million in 2014, which generated $80 million in revenue for the company. Last year, by comparison, they managed $120 million with estimated earnings totaling $40 million. The next logical step is a public offering. Galai cannot talk about it but Calcalist has discovered that it is planned for the first half of 2015 based on forecasts that will be presented in Q1, and that Outbrain has already engaged investment banks Goldman Sachs and JP Morgan as underwriters.
The grey area between content and advertising
Outbrain’s logo, in which the letter “O” is represented by a spectacled orange head, adorns the recommendations which appear at the bottom of content websites and also in their mobile apps. Most recommendations lead to articles that are not sponsored, but the company’s revenue is generated from two other types of recommendations. Half of the revenue comes from recommendations that direct users to an article that appears in the website of the company promoting it, and it promotes its own products (for example an article that leads to a guide on life insurance promoted on the insurance company’s website). The other half of the revenue comes from recommendations that fall within the grey area between purely editorial articles and sponsored articles – which are editorial articles that promote a product (for example a recommendation that leads to a positive review of a car of a certain make).
The company claims that it genuinely tries to match content to the users not by collecting personal information but rather based on four parameters: Relevance (if you read an article on a football club in Barcelona, you get recommendations about football, about Barcelona or on the basketball [sic] club; Influence (let’s find other people who read the article about Barcelona and see which other articles they read and we’ll direct you to those); Similarity (segmentation that makes it possible to identify users who are similar to you, for example those who also read about Barcelona, the new iPhone and Ebola, and recommend other articles for you that they read too); and Popularity (a clear advantage for articles that appeared as main headlines on other websites, or starred as “most popular” or earned large quantities of “Shares” on social networks).
At the same time, in order for users to feel that they are not being blatantly promoted to, every monetized Outbrain recommendation is accompanied with a full-disclosure disclaimer along the lines of “Sponsored Content”. It’s not enough to prevent criticism though. The blurry line between the interests of the users and those of advertisers and publishers in the space in which Outbrain and its competitors operate has resulted in a fair amount of criticism. Netscape founder and internet pioneer Marc Andreessen, for example, referred to the industry as “not serious” and has been drawn into arguments on Twitter with Galai himself who made a point of replying to him.
“The third party ‘related content’ thing is absolutely insane. Anyone serious who uses one of those should be shot” claimed Andreessen, one of the world’s most prominent investors and co-founder of VC firm Andreessen-Horowitz. To demonstrate how the industry demeans content and thereby its readers, Andreessen randomly selected an article from Outbrain’s recommendations on CNN’s website and pointed out loud and intimidating headlines focused on celebrities. He then claimed that Outbrain is among “the best of the bunch” and that he was referring mainly to its competitors.
“Marc Andreessen is probably one of the smartest people on the planet, and he complimented us several times in our Twitter battle”, says Galai now. “But he doesn’t live in the world of publishing the way we do on a day-to-day basis. And there’s something else that wasn’t apparent during my correspondence with him: That he actually has a horse in this race. VC firm Andreessen-Horowitz invested $50 million in BuzzFeed, a website whose business model drew much of its inspiration from us. This $50 million is in fact a demonstration of faith in our industry. If at the conclusion of all our tweets the world’s biggest investor who is also one of the two inventors of the internet says that he believes in our industry, that’s a huge compliment.”
Galai’s struggle with the criticism is complicated. Of course he knows what the critics are talking about. Of course he too is concerned about the “blurry lines”. “The only thing that interests us is to recommend the next article for the user to move on to, and we focus only on this”, he says speaking as a “promoter of stories” in an effort to minimize the fact that Outbrain is essentially an advertising network. But then he adds “there’s nothing wrong with sponsored articles or links as long as they match what you’re looking for. When I look at search results on Google, some of the best results are those that the advertiser paid to promote. In other words, Google has an interest in organizing the search results in a way that’s good for the user, and if you’d take away paid listings, the entire search engine would be less successful. That’s the takeaway that I want to bring to content websites: Good recommendations. Sponsored recommendations are not money grabbers. In my view, these are recommendations to articles that you couldn’t find in the website you’re visiting, and if this website didn’t promote an article on the history of coffee and Strauss’s (one of Israel’s largest international food & beverage companies) blog did, then my only way to bring it to you is via Outbrain, which both improves the user’s browsing experience and helps the site you’re visiting to monetize its content.”
Beyond just “talk”, Galai also “fired” a few clients in order to strengthen Outbrain’s reputation as a provider of quality content. In 2011 he parted ways with clients whose products were controversial and tempted users to provide their credit card details – such as Forex websites, unapproved medications and dietary supplements – thereby foregoing a quarter of the company’s revenues that year. In 2013 he also let go of websites that provided sponsored articles without disclaimers of full disclosure, which eliminated about a tenth of the company’s revenues that year. But it was a price worth paying in order to attract big advertiser brands that usually shun environments filled with inferior advertisements, and to attract the main news websites that also steer clear of the same types of ads. He basically tried to position Outbrain as the premium player in the industry.
Indeed, according to Israeli research company SimilarWeb, most of the web traffic that passes through Outbrain either arrives from internet giants such as international news websites, or directs traffic to them. Web traffic from competing companies flows more around viral content, entertainment and gossip websites. Outbrain’s main competitor, Israeli company Taboola, typically attracts this type of web traffic, although it has also secured a few sources of quality traffic from sites like Business Insider and Daily Mail.
In parallel to each company’s policy, regulators and other official bodies are also reinforcing the need to distinguish between editorial content and sponsored content, but Galai doesn’t believe that regulation is what will guarantee the quality of the space that he himself created. “Regulation arrives only from within”, he says “like the changes in the algorithms of Google and Facebook. In the end companies will do what’s good for them, and what’s good for them is what’s good for the users, as Google has proved.”
A serial entrepreneur, this time here to stay
Galai, married and father of three, is the son of Prof. Dan Galai who was previously Dean of the School of Business Administration at the Hebrew University and is today Chairperson of Sigma Investment House. Galai (the son) actually started in the field of Design, studying in the Holon Technical College and was among the first web designers in the country. Even back then, as a fan of magazines, he tried to think of ways to “transfer the experience of flipping through the pages of a magazine to the internet.”
In 1999 he started his first company, Ad4ever, which strived to make online ads more attractive and interesting, but “in fact I must apologize for what we did with this company, because we invented the field of floating ads, which are rather annoying.” Galai left the company on account of differences of opinion with the other founders.
Within a year he founded Quigo together with Oded Itzhak. Even back then they thought about recommendations for online users, but then the bubble burst and the company changed its business model and became an ad network. It enabled them to not only survive but also to reach a spectacular exit, and along the way to also develop the model of contextual ads – a model that Google’s AdSense ads are based on and which generated $13 billion for the search giant in 2013.
Galai left again. “The deal was good, the company was selling and the acquisition sum was nice, but as a user who loves to consume content it frustrated me that the further we progressed the worse the ads would become. They got to the point where I was ignoring them completely. It bothered me, because if I’m ignoring the ads from the very company that I created, the future isn’t bright here, nor will it be bright for journalism if this is our attitude towards the elements that fund it.” This is what gave rise to the idea for Outbrain.
When you look at Galai’s path, it’s apparent that all of his companies strived to improve both the browsing experience and the advertising experience for the user at the same time. In his previous two companies, he essentially admits that he failed to achieve this goal. “So what will prevent Outbrain from becoming a third disappointment?” I ask.
“It’s now beyond just me. There are 430 workers here for whom the user experience is in their DNA. I had the luxury of choosing investors and a board that are committed to this vision. The boss of the company isn’t me, it’s the user” he suddenly returns to precise, grand statements.
And there’s another difference: this time, as far as he’s concerned, he’s here to stay. Yes, he admits that he’s a “serial entrepreneur”, but this time it’s different. “People always ask why entrepreneurs leave to start something new. It’s like asking Shlomo Artzi (a famous Israeli musician): You’ve already released a terrific record, why are you making on another one? It’s a bug that we can’t shake off. In my case all of my startups were in the same field, and Outbrain looks like somewhere I’ll still be at in another 15-20 years. Of all the companies I founded, this is the company that I’m leaving as my legacy”.
And everyone’s waiting for Google
Adam Singolda was born almost a decade after Yaron Galai, and two years after Galai launched Outbrain’s content discovery platform, Singolda launched its competitor Taboola and offered clients more attractive prices as part of an aggressive public relations campaign. Taboola’s momentum in the past year is impressive: The company has expanded its market share throughout the world, has won a strategic client in Yahoo Japan after beating both Outbrain and Yahoo America in a tender worth tens of millions of dollars, and is preparing for another investment round of $80-$90 million. Nevertheless, Taboola “only” has just under 480 million unique users compared with Outbrain’s 580 million. According to research company SimilarWeb, a user that arrives at an article through Outbrain spends an average of 2.5 minutes on the page, which is double the time that Taboola users spend on an article. Also financially, Taboola generates 30% less revenue than Outbrain while Outbrain’s revenue model allows the company to invest more in Research and Development.
To better understand the competition between the two companies we must delve into the past. Taboola once focused on analyzing content in video clips in order to recommend them within websites, and at that point Outbrain even offered to buy the company, but Taboola declined and decided to battle it out with Outbrain head-to-head and develop recommendations for text-based articles as well.
Galai tries to avoid referring to Taboola and in the end says: “Singolda and I are friendly, and in the beginning I even helped them. There is competition between us but at the end of the day the real competition is over the user’s time, and it’s against slightly larger companies like Facebook, Google and Yahoo. This is where the user is and where he consumes content.
“I think that as an ad network Taboola does good work and achieves good results, but we think about the field differently”, he adds, and then proceeds to talk about other competitors without naming any names and removing his kid gloves: “When you take on the burden of a leader, from the outside it might look like the company is less efficient but you have to look at the nuances and understand where it stems from. On the other hand, when you’re in ‘squeezing the market’s lemon’ mode, you don’t have to invest in R&D and growth for the coming years but simply be the fastest squeezer of all.”
Another of Outbrain’s main competitors is Yahoo with its Gemini project which is currently being developed in the company’s offices in Tel Aviv. When Yahoo’s Q1 figures pleasantly surprised everyone, CEO Marissa Mayer made it clear that native ads were among the main factors for the boost in revenues. This is the same Yahoo that up until 2 years ago was one of Outbrain’s biggest clients.
“I take it as a compliment”, says Galai about the competition from his old client, “because they learned that the fantastic results in this area come from using our technology. I think that they still have development work ahead of them; this type of platform is difficult to develop overnight. And there’s another point: Yahoo is a publisher that competes against other publishers, and publishers don’t tend to share confidential information about their popular content with their competitors. It’s like BBC coming to SKY News and offering them a service. In my opinion other websites will view Yahoo’s platform as a Trojan horse. We, on the other hand, offer a content discovery platform that caters for all of the large news outlets and that’s the basis of our business. In any case, Yahoo’s entry into the market is good news, because they wouldn’t be entering a new market if they were looking at a turnover of hundreds of millions of dollars, but rather a market worth billions.”
After Yahoo, the next player expected to enter the market is Google, which has begun a partnership in this area with Forbes. Galai is already waiting for this: “Today there isn’t a website in the world that doesn’t incorporate Google’s AdSense ads, but the fees that we charge for our recommendations are maybe a tenth or a fifth of the fees that Google charges, and the performance levels that our recommendations create are much higher. That’s why I can’t understand how Google will be able to approach a publisher and offer him two types of ads, one of which is significantly cheaper, and ask him to choose. There’s some sort of flaw in this business model. But we are not complacent, we understand that there will be competition and are investing a great deal in order to be ready for it. I’m sure that Google will enter the market in the end.”
This article was first published in Hebrew by Calcalist, Nov 11, 2014. Translation by Noya Lizor
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