How Long Can “Ad Supported” Last?
Posted by Nick O'Neill on July 19th, 2008 5:19 PMI got in an interesting conversation earlier this week while at a dinner with Sarah Lacy and a number of active D.C. technology participants. At one point in the conversation we began discussing the concept of “ad supported” businesses. If you hang out in the internet entrepreneur circles, you can’t talk to five people without one of them telling you about their hot new business which will of course be advertising supported.
I will not suggest that an advertising supported business model doesn’t work, I just know that the majority of people chasing an advertising supported business model are doomed from the get go. The biggest problem? They expect that an investor is going to give them money early on in the life of their business. The funny thing is that recently I’ve actually met a number of people who have been given a small investment to try to make their ad supported business work.
Many of these investments just don’t seem rational to me though. Since when were investors throwing out money to let people with an idea throw shit against a wall? As far as I know, smart investors base much of their investment decision on the team running the company, not the idea. This post isn’t about making bad investment decisions though, the real question I have is how much longer can the new wave of internet startups be supported by advertisers?
We’re All Building Media Distribution Companies
On the web I’ve realized that there are really two primary types of companies: distribution platforms and media companies. This is an oversimplification of internet companies but most internet startups can be placed somewhere along the distribution/media spectrum. A blog for instance (that attempts to generate revenue) constantly needs to balance between distribution expansion and media creation.
All the micro-blogging platforms are pretty much distribution platforms where the users build the media. Facebook is the same way. The largest startups are ultimately distribution platforms. Google for instance doesn’t create media for the most part, they simply provide the media producers that they index a massive distribution channel.
The path to billions is through building a distribution platform. The only problem is that a distribution company (platform) is only as valuable as the media that they host. Widget platforms, social platforms, micro-blogging platforms, you name it; they all need quality content.
Market Saturation Has Arrived
At this point in the market there are way too many distribution channels. The widget platforms, social platforms, video platforms and the internet in general have become saturated with distribution platforms. I would compare the race to build platforms similar to the race to develop worldwide broadband access at the end of the last century.
Suddenly the price of broadband internet access dropped exponentially as well as the cost of storage and those two things together led to the commoditization of data storage and data transfer. I would argue that the race to build social networks and other data platforms on the web for the purpose of distribution have done something completely different: they’ve commoditized advertising (or at least have built a massive ocean of cheap advertising).
If I ran a billion dollar company (or even a multi-million dollar company), I could find a limitless pool of cheap advertising. Right now the only thing that can successfully generate meaningful advertising revenue on the web is search. Search is still the only thing that can measure intention and nobody has figured out a better way to reach people.
Honestly, do we need a better way to advertise to people or do we just need better businesses to advertise? The one place where I am betting something will arrive is via social advertising, but even that has yet to be perfected. Facebook and others are betting heavily that social advertising will transform the industry yet again.
Novelty is Gone, People Want Quality
If you think about it, there has been a novelty factory for the internet. Less than 15 years ago I began navigating the web via bulletin board services. The concept of live chat was mind blowing. Even e-mail was mind blowing at that point. Bulletin board services were frequently limited in their reach though and soon enough AOL blew down the walls and made a global platform where I could easily connect with people on a global scale.
Chat rooms proliferated and users kept on “connecting”. We are still obsessed (myself included) with trying to make sense of the “social web”. Just this afternoon, in a post on FriendFeed, Steve Rubel pointed me to a post on Twitterholics which highlights a new service called Twitter StreamGraphs. This tool will make a beautiful chart of words typically associated with an arbitrary word found on Twitter. A sample chart is below.
While the geek in all of us loves to observe beautiful charts that we hope provides some sort of meaning, I think that much of the discussion on these new platforms resembles the chatter found on the newsgroups and chatrooms of the past. While it isn’t pointless, it adds little value to the average Joe. In other words, it is a lot of inside jokes. As such, I would suggest that many of the people racing to create the next distribution channel (”platform”) may want to reconsider their business model.
While there is money available for innovation, there is little space for new players innovating media distribution on the web. So why aren’t advertisers spending heavily on social media platforms? In my opinion I think much of the content doesn’t have a high perceived value to advertisers. It’s much better to go advertise on the “database of intentions” than next to next to a site where I go into much detail about what I ate for dinner last night.
On Google, relevant content (and frequently quality content) is rewarded with traffic. At this point I would suggest that it may be much better for startups to start focusing on quality content rather than the next distribution channel. While somebody is bound to start the next Google, quality content always has some sort of intrinsic value.
Will Ad Supported Platforms Last?
The question still remains: is there still room for ad supported platforms? I think I’ve made my position pretty clear but I’d love to hear what the readers think. Is there more value in investing in quality content production over distribution? Can quality content actually be rewarded in a world with limitless distribution?
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I think ad supported models will last. However, I think performance will be the determining factor. Social networks like MySpace has certainly proven that ad performance is largely situational. In a MySpace like environment, ads are largely ignored. Creative page variations are huge distractions.
In other environments, LinkedIn for example, ads are considered premium. LinkedIn's recent report that they are generating CPMs as large as $75 is a great example. Quality, targeted ways to reach premium highly sought after individuals such as baby-boomers and generation Xers will continue to dive advertisers to spend money. Outside of search, Internet advertising will become more and more about brand impressions vs. clicks. Broadband proliferation has created better opportunities for video and rich-media ads.
It is clear that attention has clearly shifted to the Internet. In a world where content has become plentiful, context is now King! Content without context yields low CPMs and every lower CPCs. Platforms that target and focus on both, will always be sought after.
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I think marketers need to understand that and make their plans accordingly: paid search is for lead generation, sns are for branding. Attempting to use sns for lead generation might even have negative branding effects (see Schlitz). We'll see how this pans out in two to four years.
Btw, I drink neither.
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What I believe, and in fact am betting on, is that a start up that can combine unique, quality content inside a very specific context or social network will have substantial value to advertisers. Basically, if there is appropriate context, i.e. a social network of tightly defined high net worth or demographically desirable people, and in that context there is top quality content, you will get the higher CPM that investors are looking for.
Advertising is always going to have a place, but I agree, the ocean is now so vast that unless the content is placed in context it's value is only going to decrease.
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