The popular notion among Internet "cognoscenti" is that the link economy rules. All you need do is get enough traffic coming in through getting people to refer audience to you and you'll be fine. Only, that is utter hogwash because it neglects economic and business reality.
I've argued in the past on BNET Media that too much of the business "planning" online is nothing more than pipe dreams without even the most rudimentary numeric analysis. I'm not saying that an online business cannot survive on ads. What I am saying is that for most businesses, the possibilities are remote and that the executives in charge don't do the hardheaded basic examination to see if they're about to flush investor money down a very dark hole. What will increasingly work under ad-supported models will be niche areas that supplement their income in other ways or small-scale operations whose operations are relatively inexpensive.
The first observation is that there's just not enough money out there in search-based ads. For those who want to point to Google (GOOG) as a success story, realize that's the same as saying that the California Gold Rush was successful because the people who sold supplies to the hundreds of thousands taking a chance actually did well. Take Google and the combination of Microsoft (MSFT) and Yahoo (YHOO), and you've accounted for the vast bulk of search-derived revenue.
If you want to look at online display advertising instead, here's a bit of insight from a Folio Magazine interview Jack Griffin an executive with major publishing house Meredith Corp. (MDP):
Some of the numbers I've seen on display advertising indicate that something like 95 percent of the dollars go to the top 50 players in terms of uniques, and 75 percent goes to the top four. Everybody else is left with table scraps. It's really hard to be a traditional media company and say you're going to be a scale leader when you're competing with the likes of Glam and Yahoo.In other words, the vast majority of companies online are wrestling for orts -- table scraps. Furthermore, according to the research Griffin has seen, including in his position on the board of the Internet Advertising Bureau, display ad revenue was actually down 5 percent in 2009. Most companies are almost completely squeezed out of the pie, and the size of the slices are also getting smaller.
I've argued that tech companies have to get smaller because we've seen an atomization of technology. Users can now get only what they need, and not more expensive bundles, whether hardware or software, that fueled corporate revenues.
Online ads have felt the same pressures. Griffin mentions the standby argument of there being infinite ad inventory, which means you can expect prices to sink through the theory of supply and demand. But there's another factor. Similar to atomization of purchasing by end users, we see atomization of purchasing by advertisers. They no longer need to buy into the myth of getting all the audience that a print or broadcast outlet theoretically reaches because, instead, they purchase measurable impressions. The old lines of bull that advertising salespeople threw at ad buyers don't hold water. You can get exactly what you want, measure the outcomes, and pay for only what you got, not for the overall opportunity.
Some companies will be able to survive on this, but a great many will not. Given the massive plummet in private equity fund raising last year, there will be a lot less available money for sustaining companies that can't find a way to make it on their one. The media ventures and the web services targeting businesses and consumers will have to find new ways of generating revenue because they won't have the money to hold out for the hope that some day their ads will come. And as consumers have become accustomed to getting what they want for free on the Internet, it's safe to say that we're about to see a horrific financial crash, as people and companies alike come to realize that what they expected -- everyone wins, only the advertisers pay -- is about to come to a splintering halt.
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