The end of the Web 2.0 advertising myth

For a long time, I was reminded of The Graduate whenever I met with an eager, undeniably smart and ambitious Silicon Valley founder. After he explained the consumer value the Web 2.0 service created, I’d ask the business model question. Instead of whispering “plastics,” it was “advertising.”

This unflinching belief in advertising as the catchall monetization tool came out of the strange Valley culture, which I’ve found just as inward-focused as the more-maligned East Coast media industry. The VCs, analysts and entrepreneurs all bought into this idea that if you build a large enough audience, you have a media business. Not quite. On one level, I understood this line of thought. Unless you have scale, you don’t have a business anyway, so focus on scale. But it led to a nearly comical belief that the process of actually making money was quite easy, like turning on a spigot. Dave Karnstedt, the Efficient Frontier CEO, spent six months as an executive in residence at Redpoint Ventures. He told me a disturbing number of companies he met with pointed to AdSense as their revenue model. What many companies are finding is even if they build to what they find what they think is scale, it’s not enough.

This is the great unraveling of this Web 2.0 advertising myth. As Wenda Harris Millard said, “There’s not enough advertising to go around.” The Times has a story about how iMeem and other music services have recognized the economics of ad-supported music aren’t there. News Corp's Jon Miller had some interesting things to say at All Things D about how even a behemoth like MySpace needs to diversify its revenues. On a much smaller scale, Om Malik rolled out a subscription service for his GigaOm network of content sites.

Like other unravellings (not a word), this is going to get messy. This is the year these venture-backed startups will have to figure out their business models, and it couldn’t come at a worse time. Web 2.0 companies will come to realize that building a media business is hard work, not just matter of amassing millions of eyeballs. Many services built are communications platforms that don’t perform well on a direct response basis. That means relying on scarce brand dollars. And the process of selling brand advertising is painful and requires a totally different skill set and culture than these tech companies possess. The upside is the next generation of startups will most likely focus on their business models earlier – and be a little more creative than using advertising as a cure-all.

Comments

[Larry Irons]

From a few items I'm reading lately it looks like good old traditional mass media is facing a similar challenge in its own business model...

http://tinyurl.com/r6hqbt

[Max Kalehoff]

Sorry to underscore the obvious, but EVERY media business will need to reconfigure, if not figure out, its business model. The legacy of "different skill sets and cultures" is in a lot of trouble, too.

[James Cooper]

Whenever I think about stuff like this I find it useful to do a reality check on my own media habits.

How many times do I respond to paid for advertising on the web? Somewhere between never and never ever.

What percentage of my online content do I now expect to get for free?
Pretty much all of it.

I think the only people making any serious money out of AdSense etc are surprise, surprise, Google.

[Vijay]

It's happening Brian. Check out the following:

E-commerce is coming back!

IMShopping: A twitter based shopping service.
http://www.ecommercetimes.com/story/IMshopping-Brings-Human-Touch-to-E-Store-Browsing-67036.html

Billing Revolution:
http://bits.blogs.nytimes.com/2009/05/27/will-mobile-shoppers-want-to-ring-up-purchases/?hp

[Sean Bohan]

I love this post

Here is the thing, didn't we already see this movie a couple years ago? "Get the eyeballs", "get to critical mass", and "our startup's revenue comes 100% from advertising". It was the 90s. We all promised we wouldnt make these same mistakes again. We swore to uphold the Web2.0 creed and this time, this "reboot", it would be different.

And so we are now using open APIs and crowdsourcing and user-generated content and leveraging pervasive cheap broadband access to "sustainably grow our audience" (eyeballs) while having a mix of sponsorship and advertising as revenue (its all advertising).

"The upside is the next generation of startups will most likely focus on their business models earlier – and be a little more creative than using advertising as a cure-all." - the sad thing is, not only are you right, but if you wrote this in 2000, you would have been right twice.

If the 90s were all about "build to IPO" then this round was all about "build to flip to GYMA (google, yahoo, MS or AOL)

[WillyWa]

Haven't you ever heard of "Performance-Based-Word-of-Mouth-Video"?
This will be the Next Wave of the Future.

File it under the category of: Social Monetization Model

The round file, maybe.

Seriously, dollars will continue to be funneled online through our traditional offline media folks. Convergence will support this, and 5 years from now, we'll be asking the same question:

There's not enough advertising to fill every placement on every digital ad space. Yes, sell through is low, many monetization strategies are questionable (Twttr), but, welcome to emerging media.

WW

[Bart M]

if the New York Times is struggling to survive using an ad revenue model, I think most others will as well.

let's rewind back to '99 and start asking these companies 'what's your business model'. Eyeballs is not sustainable.

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This is the year these venture-backed start ups will have to figure out their business models, and it couldn’t come at a worse time.

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can't charge for "Enter search term here" form enhancements ;-)

[louis]

Sorry to underscore the obvious, but EVERY media business will need to reconfigure, if not figure out, its business model. The legacy of "different skill sets and cultures" is in a lot of trouble, too.

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[Liga 1]

In my opinion Web 2.0 advertising at this moment is a very profitable business.