Matrix Partners, a US-based investment firm with additional offices in India and China, this morning announced that it has closed two new funds: Matrix Partners China II (at $350 million) and Matrix Partners India II (at $300 million). The funds bring the firm’s total international assets under management to $650 million in China and $600 million in India.

Matrix Partners established an India presence back in 2006 and has an experienced entrepreneur running its investment team there: Avnish Bajaj, co-founder and former CEO of India’s largest online marketplace Baazee.com (acquired by eBay).

The firm has been active in China since 2008.

Matrix was an active player in the development of the VC industry in the 1980s. The firm’s predecessor, Hellman Ferri Investment Associates, was founded by Paul J. Ferri and Warren Hellman (founder of San Francisco-based PE firm Hellman & Friedman).

Matrix Partners was an early stage investor in companies like Apple, JBoss, SanDisk, Tivoli Software and VERITAS Software. Recent investments include Anjuke, HubSpot, Zendesk, Care.com, GOGII, BuyWithMe, Gilt Groupe and Zong.

Editor’s Note: This is a guest post by Mark Suster (@msuster) a VC at GRP Partners. He blogs at BothSidesoftheTable.

Banner Ads. They first started in 1994 and are therefore almost as old as the Web itself. They were very effective back then, with the original ad garnering a 78% click-through rate (CTR)!  I guess from there we had nowhere to go but down.

Nowadays banner ads get on average 0.2% CTR meaning for every 1,000 ads that are served up only 2 people click on them. And as Jon Steinberg of Buzzfeed points out, the CTRs for social media banner ads are just 0.08%.

Holy Shiitake!

Despite its creation more than 15 years ago, banner ads have been surprisingly resilient despite their lack of efficacy. In the IAB study that revealed the graph above, brand advertisers indicated that their number one objective in online advertising was “creating awareness” followed by “creating purchase intent” or “likelihood to recommend” the product. Yet these seem to be the least effective attributes of banner advertising.

The fundamental problem with banner ads is a condition called “banner blindness” meaning that our eyes are really quickly trained to look at what is most relevant on the page – the content we want to see. Check out this chart from eye-tracking research conducted by the usability guru Jakob Nielsen published in this piece. It shows that our eyes are trained to focus on the text, not the ads.

I’m sure it probably resonants with how most of you read the web.

So I’ve spent the last few years checking out companies that are trying to solve for this problem. The global advertising market is estimated at around $475 billion / year with only 12% of this online and measurable. (some data sources have this estimate much higher.) We believe that the structural industry changes will continue to create big opportunities for technology firms that enable the changes in media consumption for television, radio, inbound calls, online & social media. We are investing heavily in these changes.

One company that I previously wrote about trying to change this industry is, Solve Media, (I am not an investor) has created an interesting ad unit designed to drive up brand “engagement” and recall. The idea is that if I can serve you an ad for a function that you already need to perform on the web anyways – a captcha – with a brand message I can drive recall. And market research seems to confirm this.

You’ll see a clear problem here. Traditional banner ads only drive 16% brand recall and almost ZERO message recall. So it’s hard to argue that brands shouldn’t worry about CTR rates when it doesn’t seem that banners are very effective for branded advertising or awareness either.

It’s no big surprise that the overwhelming majority of online spend has therefore been “direct response” advertisements (trying to elicit an action) rather than branded advertising as pointed out in this good summary by Jeremy Liew.

So people will spend money online to get you to sign up for credit cards or Netflix but not to change your laundry detergent. I decided to look up one branded company in the chocolate segment to get a sense for the magnitude of spend online. Hershey’s chocolates spends about $365 million in advertising per year. Just $460,000 of this is spend on online display ads (0.1% for those without a calculator handy).

The reality is that advertising has got to become more integrated with content in order to drive efficacy. I know that any time ads are mentioned it makes the blood boil on any self respecting technologist the same way it did when HotWire ran their first ad in 1994 and the way it made Google’s blood boil when Overture launched the sponsored search category.

Ask anybody if they like product placements in movies or TV and they’ll resoundingly tell you “no” but marketers know better, which is why the celebrity endorsement industry is a $50 billion industry.

But even for the consumer reality sets in. Firstly, we care more about getting cheap or free high-quality media than we do about whether we see ads. Give people massive price increases on most media and they’ll abandon it. So how people behave and what they verbally say they stand for are often at odds.

Integrated Advertising

I believe that “integrated advertising” is one of the more effective types of advertising out there. You have to find a way to get your audience to actually “engage” with the content in the way that Solve Media is doing, in the way that in-game advertising works for video games or the way that celebrity endorsements work.

It’s why I still believe passionate in companies like Adly (I’m an investor) who have created ways for celebrities to integrate endorsements “in steam” in a Twitter feed. Yes. Oh, sacred cow. In the steam. Integrated with where our eyes & attention are. I advocated strongly for this 18 months ago and my belief system is as ardent as it was back then. If you’re interested here is my case.

But the simple facts are:

• Our attention is all in the stream. As evidenced by the eye-tracking studies – they will remain in the stream.
• We know that celebrity endorsement works. It has for decades. Celebrities care about their personal brands so will naturally rebuff requests to sponsor inauthentic products.
• The beauty of social media is that consumers can vote with their “unfollow button” so it has a natural self-correcting mechanism. If you get economic value out of having followers you don’t want to lose them over one ad.
• Sure, there needs to be ad disclosure. And naturally we have built in quality controls like: frequency capping, automated measurement so we can pull ads that people respond poorly to, A/B testing tools, data analysis to tell celebrities & brands which products will resonate, etc.

But I can tell you as my firm invested in Overture who created the category of pay-per-search that Google perfected – our company underwent three years of ridicule in Silicon Valley until people looked at the performance data and realized that efficacy matters.

The technology blogs will be aflutter with continued criticisms of in-stream ads while mainstream consumers continue to click on links provided by the celebrities they respect and will buy products accordingly. We already have the data that proves it.

In Image Ads

Another areas that I’ve been really focused on over the past 2 years is “in-image ads” as another form of integrated media. When you think about the eye-tracking we know that people care about the story and the images. And it is already an accepted fact that in many cases the ads & images are blended as any lady who reads Cosmo or Vogue will tell you. The big splashy image ads is part of their reading experience.

So we put our money where our mouth was an invested in the largest in-image advertiser on the web, GumGum, whose network now reached over 100 million monthly uniques with 3 billion ad-compliant images, delivering an average CTR of 0.4% (2x industry average for banners). The eyes are in the image. We believe this is why Google Ventures invested in Pixazza.

As you can see from this image, the ad is unobtrusive and potentially valuable to the reader. The ad unit is served up based on algorithms that determine what is actually in the image and also for whether an ad placement would impair the image. We could even target ads better based on who the end consumer was.

What else is out there in the field of integrated advertising?

Vibrant Media & Kontera have both built large and fast-growing businesses around text-based advertising and there are new entrants doing it in new ways like SkimLinks. Vibrant has a reach of 250 million uniques, making in the 12th largest ad-focused property online and has 3rd-party verified studies suggesting up to 50% increase in brand lift following their in-text ads (I’m not an investor in any of these companies). Text is shown to deliver higher CTRs than banners. Text is what we’re reading. It’s integrated.

There is a whole industry being spawned in the Internet video world and especially in the integration of devices (second screen TVs) and the TV experience. Some of the interactive experiences I’ve seen in recent demos are simply mind boggling and are starting to form new opinions in my head about how we will consume big screen TV in the future (I’ll save that for a future post).

The games industry has massively changed over the past several years to more of an integrated advertising / purchasing media with the growth of virtual goods and ads. An obvious example of integrated media would be the new Rio Angry Birds version. It’s actually very cool. There are increasingly incentivized offers to get more powerful swords & shields in battle games. This has proved far more effective than small crappy banners at the bottom of each screen.

There will always be a tension between advertising wanting to reach audiences through whatever means they can to capture their attention and help them discover new products and consumers who claim a strong preference for ad-free products. Yet the other tension between ad-free products that cost more versus ad-supported models have a clear winner: ads. On products where I’ve seen data the “ad free” versions have converted at 4-6% of the user base at maximum.

So the future of helping make the ad industry more measurable (and more online) I believe will be one of helping make ads both authentic & integrated. Trying to relegate ads to the least intrusive real estate of our computers is missing the point. Advertisers pay for efficacy.

If not, we’d be telling advertisers to just leave all of their branded advertising spend on traditional television in the future. And to stick with their old adage, “Half the money I spend on advertising is wasted. The problem is, I don’t know which half.”

Two California residents, Drew Moss and Sahar Maleksaeedi, have filed a rather peculiar class action lawsuit against Twitter (see documents embedded below).

Basically, they’re suing over the fact that Twitter sent a confirmatory SMS to their cellphone after they themselves used an SMS command (‘STOP’) meant to turn off all phone notifications.

The two men allege that Twitter has engaged in unlawful conduct by contacting them on their mobile phones without their consent, which they say is a violation of the Telephone Consumer Protection Act of 1991 (TCPA) and an invasion of their privacy.

Here’s the relevant part in the lawsuit documents:

At some point Plaintiffs decided that they no longer wanted to receive text message notifications on their cellular telephone from Defendant.

Plaintiffs then responded to Defendant’s last text message notification by replying “stop,” as instructed by Twitter.

At this point, Plaintiffs withdrew any express or implied consent to receive text message notification to their cellular telephone that they may have previous given Twitter.

In response to receiving this revocation of consent, Defendant then immediately sent another, unsolicited, confirmatory text message to Plaintiffs’ cellular telephones.

Moss and Maleksaeedi says an “automatic telephone dialing system” was employed to deliver the confirmatory message, and that they incurred a charge for incoming calls as a result. This is illegal, the two men claim, because the message in question was not sent for emergency purposes and without prior consent given.

According to the lawsuit documents, Moss and Maleksaeedi seek up to $1,500 in damages for each call in alleged violation of the TCPA, which, when aggregated among a proposed class number in the “tens of thousands”, would exceed the $5 million threshold for federal court jurisdiction. The suit is expressly not intended to request any recovery for personal injury.

I’ve contacted Twitter for comment on this rather bizarre lawsuit but haven’t heard back yet (it’s still very early in California, so we’ll update as soon as we get a response).

(Photo by Flickr user mira66, used with permission)

twitter-complaint

The Royal Wedding is finally over, and William and Kate are hitched. The wedding goes beyond just a ceremony, the event is actually a huge business. Between replicas of Kate Middleton’s engagement ring and Royal Wedding china, retailers are profiting off of the nuptials. And eBay and its merchants are part of this business. Here are a few stats related to the searches and purchases of wedding-related items on the marketplace.

• In April, more than $70,000 and 3,000 items related to the Royal Wedding have been sold on eBay
• Kate Middleton searches are five times more popular than those of Prince William
• The most expensive item sold was Kate Middleton/Princess Diana replica ring for $1,500
• Monthly eBay searches for Royal Wedding products have risen a staggering 1,815% in 2011

Sharing what mobile apps you have in a social network has been tried various ways. Appsfire hit on the idea of socialising apps.

Zwapp is coming at it from a slightly different angle. Its iPhone app (iTunes link) auto-discovers what apps you have on your iPhone and connects up your contacts, Facebook and Twitter friends. You then follow people who’s opinion’s you respect when it comes to apps. It even has a live feed where you can see what apps your friends are using and downloading (privacy is now most definitely over it would seem).

Onavo, as we just reported, is a magical iPhone app which literally shrinks the data your phone uses and thus your roaming data bill when you are travelling.

It launches today and I caught up with CEO and co-founder Guy Rosen at The Next Web conference in Amsterdam.

There’s really no better way to describe Onavo other than a must-have app for any and every iPhone user on a data plan. I’ll go a step further: I think it’s the very first app one should install.

Why? Because Onavo shrinks your data usage (and thus, your bills).

All you need to do is install the free app and you’re done. The app will then run in the background and do its thing and all you have to do is continue consuming data as you do today … surfing the web, emailing, tweeting, using maps, etc.

The techies among you are asking yourself whether there’s any slow-down in data speed. I’ve been using the app for a few weeks and I have perceived no noticeable slow-down.

What happens behind the scenes is that compression technology resides on Onavo’s cloud servers. Once the data is routed through them, the compression takes place before the data reaches the device (or the carrier).

Onavo is targeting travelers who have a very obvious pain-point of being forced to purchase ridiculously expensive data plans when on business or personal trips. Mind you, saving 5MB-15MB in data usage can equal direct savings that can go as high as $50 and up. However, with all-you-can-eat data plans a thing of the past, I contend that Onavo provides significant value for domestic data usage as well. I, for example, keep it running all the time.

I’m currently away on business in San Francisco (I’m based out of Israel) and in the past two days alone I’ve saved 11.32MB, and I still have four nights to go. Most of my savings were with Maps on iPhone, where Onavo saved me 75%, or 8.87MB of 11.80MB. Onavo also saved me 64% surfing the Web, and 12% on email.

To the best of my assessment, this is an upside-only app. And being free, there’s really nothing that should hold you back from downloading it.

This is a guest post from Michael Robertson, a 12-year veteran of the digital music business. He is the founder and former CEO of digital music pioneer MP3.com. He is currently the CEO of music locker company MP3tunes..

Amazon defied the record labels by launching an unlicensed personal cloud music service. (Disclosure: I’m CEO of competitor MP3tunes.) Music companies immediately expressed their dissatisfaction and Amazon public stated they would discuss licenses with labels. Since then considerable speculation has swirled about regarding licensing discussions Amazon, Google and Apple are having with the 4 major record labels.

Dominating the discussions is the labels concern that personal cloud services will exacerbate piracy and erode their business even further. Consequently they want to impose substantial restrictions on any such service, but each labels has different concerns and demands. Below are examples of the startling limitations major labels wish to impose on such services.

Universal Music Group is concerned that users will load pirated songs into lockers. Average MP3 players house more than a thousand songs and UMG believes that many were unpaid for. They do not want to see the billions of songs that came from P2P system laundered (think drug money) in a cloud service and become legitimate.

To combat this they want only songs with digital receipts to be able to added to lockers. For some time UMG has been demanding that online music retailers embed personal information in every song they sell. They call it UITS. iTunes has been inserting email addresses into every song while other retailers like Napster are using a unique receipt number. (Techcrunch first wrote about Dirty MP3s a year ago and how these might be used by future cloud services.)

All songs without a proof of purchase would be assumed to be unauthorized and not accepted into the system. Songs ripped from CDs would not have unique identifiers and wouldn’t be loaded. Any song purchased prior to retailers inserting personal identifiers or from retailers who have yet to personalize every song would also be excluded. (To date, Amazon’s MP3 store does not put any unique identifiers in songs despite UMG’s demand that they do so.) Promotional songs download online would also not work.

Sony Music Group shares UMGs concern about the laundering of songs, but seems more concerned about locker sharing and downloads and is demanding restrictions in those areas. Sony believes users will share lockers by visiting each others houses and syncing in each others music. To combat this Sony wants loading to happen from only one computer. Each locker owner would have to designate a single location from which they could upload songs. Users could load music from either their laptop or desktop or office computer but not all three. Their belief is that this will prevent friend to friend file sharing.

Downloading is another area of concern for Sony. To prevent lockers from become Napster like repositories they want to restrict downloading to one emergency download only. Locker owners would only be able to download their music files a single time if they claimed they were lost. All future downloads would be forbidden. This would limit the ability for a locker owner to go to a friends house, download all their music and then have the friend upload those songs as their own. This means that syncing to portable players and smart phones would not be allowed. Neither would download to laptops for offline playback.

Most worrisome to Warner Music Group is that users may setup multiple lockers and the distribute the extra lockers to friends. Imagine if a locker owner setup a locker at Apple and Amazon and then gave their less used locker away or maybe even sold it. What WMG would like to see happen is that a central locker authority would administer all locker assignments. For awhile they were pushing Catch Media as the solution. More recently they may have relaxed their demands in this area and insisted that locker identities be uniquely tied to a valid credit card or some other such verified identity.

The above list of demands is by no means complete but rather an illustration of the labels mindset. There are others issues dealing with simultaneous user access, family accounts, mobile access, local caching, regional restrictions and more. The one company who had such a personal cloud license is the now defunct Lala who had to agree to no downloads whatsoever, no mobile stream (web browser only) and costly per song stream fees.

In addition to usage restrictions, labels are demanding that cloud services pay them an annual per user fee. Labels will demand a minimum per user fee each year and not the more business friendly percentage model. Such a flat fee will mean no free or advertising sponsored service will be possible. For subscriptions services such as Rhapsody and MOG they demand the HIGHER of: per user fee, percentage of revenues or per stream fee effectively boxing in services and insuring they’re never able to turn a profit..

The challenge for cloud services such as Amazon’s is how to appease the record labels and still have a consumer friendly service that is financially viable. Even one of the above restrictions renders a cloud service mostly useless. Combined they would make a locker service utterly worthless, for sure nothing that a music fan would pay for making it impossible for the company to cover the demanded per user fees. Amazon has publicly stated that their position is that a license is not required for a service such as theirs. This issue is currently being litigated by my company in EMI v MP3tunes where we await the Judge’s ruling. With the record labels wide reaching demands it’s difficult to see how Amazon, or any company, could arrive at a workable license for personal cloud music.

According to research firm IDC, the global mobile phone market ballooned in the first quarter of this year, growing 19.8 percent year-over-year, mostly due to the meteoric rise of smartphone shipments, especially in emerging markets. According to the firm’s Worldwide Mobile Phone Tracker, vendors shipped 371.8 million units in Q1 2011 compared to 310.5 million units in the first quarter of 2010.

IDC posits that smartphone growth worldwide, particularly in Asia/Pacific (excluding Japan, due to the impact of the earthquake and tsunami), Middle East, Africa and Latin America, helped lift the overall market to a record first-quarter high.

Perhaps surprisingly, quite a few handset manufacturers, including feature phone makers such as Micromax and TCL-Alcatel, outpaced the overall market. Kevin Restivo, senior research analyst with IDC’s Worldwide Mobile Phone Tracker, says this trend contributed to share losses of some top suppliers.

Feature phones still represent the majority of mobile phone shipments, even though they are under increasing pressure from smartphones, but IDC says it does not expect feature phones to disappear quickly as there is still strong demand across the globe.

In the United States, Apple’s iPhone and HTC Thunderbolt were two devices (introduced at Verizon Wireless) that helped keep the smartphone category front and center of the overall mobile phone market last quarter. BlackBerry, iPhone, and Android devices were best sellers, says IDC, and the same trend is visible in Canada.

In Western Europe, Android-based phones and iPhones helped grow the market in the seasonally slow quarter. New devices from HTC, Samsung, and Sony Ericsson sold well in most countries in the high-end tiers.

Apple maintained its number 4 spot on IDC’s Top 5 list (see below) thanks to a record quarter for unit shipments. The company also posted the highest growth rate of the worldwide leaders, with market share rising to 5 percent.

Beleaguered Nokia remains the world’s largest mobile phone maker by volume, although its market share dropped from 34.7 percent to 29.2 percent year-over-year.

Also read: Users Will Download 44 Billion Mobile Apps By 2016

(Photo by Flickr user peruisay, used with permission)

Yesterday was a big day for hot mobile payments startup Square. The company announced that it received a strategic investment from Visa, giving the company a big stamp approval. And it also announced something that got far less attention: Square will be releasing a new card reader (the thing you plug into your phone) this summer, and it will use encryption at the read head. The news was announced with little fanfare by Square Security Lead Sam Quigley during a panel at the Visa Security Summit. But it’s important for a couple of reasons.

First is the fact that just last month, rival (and much larger) payments company VeriFone lobbed a heated accusation at the startup: it said that Square should recall all of its readers because they didn’t encrypt credit card data, making it easy for thieves to skim the information. Square CEO Jack Dorsey battled back, stating that VeriFone’s accusation that their reader was insecure was “not a fair or accurate claim and [that] it overlooks all of the protections already built into your credit card.” Dorsey also outlined all the ways that credit card fraud could still be committed, regardless of encryption, and explained that users aren’t responsible for fraudulent charges regardless.

But now we have Square doing almost exactly what VeriFone was crying foul on. So what gives?

In a blog post that appears on the Visa Security Summit website, Square COO Keith Rabois writes that the company will be adopting Visa’s new set of mobile application best practices — which were also released yesterday. From Rabois’s post:

“The adoption of best practices will help increase trust in innovative payment solutions. Of course, Square complies with all current industry standards, and we are committed to meeting or exceeding industry guidelines as they evolve.”

Square’s endorsement of the Visa guidelines the same day as the funding news is obviously no coincidence. And among these best practices is a requirement that these applications “encrypt all account data including at the card-reader level and in transmission between the acceptance device and the processor…”. Which explains, at least in part, why Square will be shipping a new reader.

But what does that mean for the hundreds of thousands of existing Square card readers? When I spoke with him earlier today, Rabois said that Square is still more secure than the vast majority of card readers in the field, alluding to the additional features Square offers, like the ability to receive text and email notifications after each transaction. In other words, he’s still refuting VeriFone’s claims that Square needs to recall the existing reader. He also says that the new encrypted read head is just one of the new features that will be included in the new Square device this summer (which is actually the third iteration of the card reader).

When I asked if this meant Square users would have to replace their existing readers, Rabois declined to get into specific details (it sounds like the plan is still being worked out). However, even if Square does wind up having to distribute a new batch of readers, the relatively inexpensive per-unit cost probably won’t have a major impact on them — though it could still be an inconvenience for users.

In a statement CEO Jack Dorsey added,

“Security and consumer trust are fundamental to our success. Square is committed to offering merchants a way to accept electronic payments that are secure, reliable and in compliance with the security standards for the global payments industry.”