b5media

To readers: Yes, yes, a REAL blog post. Hold your applause, cause this’ll probably be the only one this month!

Based on Beth Comstock’s remarks earlier this week, the web has been all afroth with news about how ad-supported startups are going to die because, to quote Beth

There are not going to be enough advertising dollars in the marketplace. No matter how clever we are, no matter what the format is.

The conversation frothed all over the Web 2.0 world for awhile before hitting some real mainstream media attention (this Reuters piece being the latest ripple). Everyone’s commented on it.

Now, I’ve basically taken the position that, largely, I don’t have time to comment on the first wave of frothiness for any given subject. But as this is the second wave, I’m gonna take a stab at it (kinda like I did with the Jeremy Liew “there’s no money in advertising” thing that went around earlier this year).

So, on this wave, here’s what’s going on.

• Reuters writes its piece, quoting Beth, saying that while more money will come online, most of it will go to big companies.
• Rafat David Kaplan (ed: David wrote this article, not Rafat, sorry Rafat!) @ PaidContent (who I have nothing but respect for don’t actually know at all) basically cites this as frustration amongst publishers
• Steve Rubel (ditto on the respect thing) says this is a supply and demand issue.

So, here are the facts. Massive amounts of new money is being spent every year online (on the order of 2-3B/year in totally new ad dollars), massive amounts of existing ad dollars are shifting online (on the order of 3-5B/year in shifting dollars), and people are surprised that the biggest brands are making the most money.

K, gotcha so far.

Yet, somehow, this has been extended to “there isn’t enough money to go around” – which is really the quote of one person at one media company (albeit a big one) who’s running into a very simple frustration: middle-sized fish in a very big pond, where she has an absolutely massive freaking budget to cover and she isn’t in the top 10 so she isn’t getting her “fair share”.

Taking that quote and extending it to web startups is kinda like me saying the Go Kart industry is dead because Chrysler can’t get its act together.

So, here are 10 reasons why this ad crisis is a myth – specifically to small to medium content creators and publishers.

1. Ad repping distorts revenue perceptions. Of the Top 10 companies’ ad revenues, 7 of them rep properties outside their network. This, obviously, includes Google, Yahoo and Microsoft – but it also includes AOL and most other real “media” companies. Even MTV, Washington Post and the New York Times are doing it. What does this mean? That a significant portion of their revenues are bubbling down to content producers and publishers. Sometimes as much as 30% of their total revenue (no comment on which company in the list that applies to)
2. The good side of supply/demand. While there is a supply/demand issue (this will be the first year in 5 years that average industry CPMs will remain flat (at about 1.25$)) – that issue is for untargetted, high-volume purchases. In “the biz” we call this remnant inventory. It’s what you stick in when you can’t find anything else. It’s guaranted revenue. On the flip side are the “gimme 20-25 year old single mothers living in a single ZIP with 2+ children, full-time income of 100K+ and a passion for fashion”. CPM’s on those? Rising like a … well, like a something that’s rising incredibly quickly. Those campaigns 5 years ago were 10CPM. Now? 35-60CPM. Why? Supply and demand. There is not enough supply (both because most companies don’t have the technology and because they don’t have the reach to deliver enough impressions to that audience to matter). Low supply, high demand.
3. Branding isn’t dead. There’s been a focus lately on how much money is shifting to performance-based campaigns. While this is true to an extent (the classic line is that most of Google’s ad revenue is performance-based, so “most” people must want performance-based). Performance is good, but “performance” isn’t just CTR and CPC and CPA and CPL and any other acronym you have. The web is the first medium that allows you to mix a real branding campaign with real-time testing to see if the branding campaign is working, for example. Can you move the Index? If so, that’s even better “performance” for big advertisers.
4. Lower costs. While big outfits like NBC and the NYT attempt to cover even 30% of their costs, they often take losses. Losses are bad. When the losses are on the order of tens or hundreds of millions of dollars per year, that’s really bad. But, web startups don’t have those costs. If an online publisher is doing less than 10M/year on costs of substantially more than 10M/year then something is probably wrong.
5. Faster growth. Most companies in the 2-5M/year range see great growth. Growth of 5-15%/month. Basically seeing revenue and traffic double every year. To these companies, they don’t mind that Google has 20% or whatever of the industry’s ad revenue. The care that they’re doing more revenue per pageview, more revenue per visitor, more revenue per employee and more revenue per sales rep. They watch their core metrics like hawks – because that’s what really matters.
6. There’s A LOT of money around. There is somewhere between 40-60B being spent every year on online advertising. Okay, so 80% of that goes to the top 20% of sites. But about 20% of that 80% comes back to “longer tail” sites through ad repping, ad sharing, etc. So 30-40% of online ad revenue is for the “long tail”. Yeah, 12-24B$. That’s a nice big pie, and it’s one that’ll only get bigger (likely doubling in the next 5 years). 50B$ just to the longer tail (non top 50). That seems like “enough money to go around” to me.
7. Some of the money is being miscounted. One minor point on the IAB and other industry numbers is that everyone knows their low. Many media companies who do offline and online don’t report separate figures for mixed-media campaigns. Cause if you’re doing a 10M$ campaign for Coke and you run it in your newspapers, your radio stations, your TV stations and your web properties… How much of that was really “online”? Also, a LOT of these deals include third party sites, as I mentioned above, so even if they were reported properly there’s a skew in there.
8. Ad repping is the new ad network. In the 90s and early 00s, the ad networks controlled a massive amount of the online ad dollars. They had reach, and reach was what mattered. These days, raw reach means low CPMs. If you’re getting more than 2CPM on average from a major network, across all your traffic, you’re doing incredibly well (and way above average). Ad repping shops are boutique shops that represent one vertical and a limited number of sites. Their pitch isn’t reach, it’s depth. Engagement. Audience quality. And at these shops you’re doing poorly if you’re averaging under 5CPM. And that’s for all your traffic. These shops will only increase in prominence over the next few years. In principle this means more ad dollars to the big fish, in practice it means that small-to-medium publishers do less work and get more money in the short term.
9. Don’t believe everything you read on the Internet. Everyone has an angle, a spin, an axe to grind. When Facebook says it was worth 6B$, you know it wasn’t just dinner conversation – they were doing it to up their price for investors. Likewise, Beth Compton wasn’t really whining, she was pitching. “NBC has lots of inventory, NBC has a great audience, we only wish SOMEONE would pay attention to how great we are online!” Yeah, poor Beth. You just know she had 300 voicemails when she got back to the office with pitches inside. And yeah, as the CEO of a media startup, I have an angle too. That angle is that not only do I believe in a properly executed online ad strategy, but that I believe the startups that are able to properly leverage the strenghts of the current market will see phenomenal growth. And, yeah, I believe that we (as a company doing 30%+ growth per month) can be one of those companies.
10. Lists suck. Ran out of things to say ;-)

All in all this is a bit of a tempest in a teapot. There are lots of ad dollars going around. The majority of companies with actual long tail traffic are doing very well. The only place there’s a real pinch going on is with mainstream media companies with mainstream media costs who haven’t adjusted to the online world yet (both cost and revenue-wise).

Boo hoo. As I mentioned in my last piece on why the online ad market was alive and well, a solid strategy, properly executed will always win out over panicked reaction to fleeting market conditions. Especially if those “market conditions” are faulty and based on poor analysis.

50B$. 30% of that is going to the small-medium market. That’s at least 15B$/year. 25B$ by 2010. Sorry if that doesn’t make me all depressed. Personally that looks like an opportunity, not the death of an industry.