Sorry, Most Web 2.0 Companies (How to Build a Bubble)

I work at a web 2.0 company and when I am not working I am probably reading about or meeting other 2.0 entrepreneurs. I love most things about the people and the web sites that we call 2.0,but there is 1 thing that troubles me, advertising.

The ads themselves don’t bother me, the fact that innovative, well intentioned and useful sites are betting their future on revenue from ads. Sites are mainly choosing ads instead of creating sell-able products. There are big problems with this approach.

1. Google, Yahoo, AOL and MSN earn 92% of Internet ad revenue. Good Luck. Additionally, these companies have-

  • Tracking Systems
  • Name Recognition
  • More Traffic than you
  • More resources
  • Bigger and Smaller Verticles

2. If you do get advertisers you are solving your short term problem (cash) with their long term problem (performance of your members). Remember advertisers can track your site’s referral traffic and conversion rates. If you have a first penny problem do you really think that those users will spend enough money with the advertisers to justify your costs? Josh Kopelman of Redeye VC  says

it makes sense to consider shifting from a pay model to a free model. In these cases, asking “who would pay to reach these consumers” (or “who can subsidize these users) creates an opportunity to build a more valuable business through the combination of exponential growth and targeted advertising.

He means it differently, but I would ask, “who would pay to reach these consumers (if you can’t get them to spend the first penny)?”

3. And finally, Google just raised the stakes by entering the Cost Per Action market. To me this means that the value of a click through just dropped.

I think that ad sales + trackability can be great, but it also helps create bubbles. When the Internet becomes hot (1st or 2nd G) people rush in. Everyday I see large (old) companies paying WAY to much for Internet ads. That junior level media buyer that purchases these ads is putting money in our pockets, but at the same time we’re being screwed. Sooner or later his boss is going to need to see the ROI.

I’m worried that it won’t be there. When that happens, and traffic is worth less – what will we have to sell?

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1 Response to Sorry, Most Web 2.0 Companies (How to Build a Bubble)

  1. Zaid says:

    As I learned in my media buying class few days ago, part of the reason the Internet is so attractive is it’s often so cheap compared to mainstream media such as TV ads or radio.

    So even with massive crappy traffic advertisers get, at the end it still gives better ROI than a 30sec TV spot.

    Every year new ad wastage report comes out. It’s nothing new. I’m skeptical if a) it is a problem financially for folks advertising and b) if it can be fixed.

    Do you think Google will ever replace PPA with PPC if it does not make them more money? And if it does make them more money, chances are the publishers will make more money too probably. Both boats sail together.

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