Add this to the "does anybody really know what they're talking about" file.
Last week, The Economist Published an article entitled "Internet Advertising will be Relatively Unscathed During the Downturn." The article talks about why online advertising is not the risky proposition it used to be, and several specific formats that seem to be doing well. It then says:
All this makes spending on advertising much less speculative, so that it starts to be treated instead as a cost of sales. This is one reason why online advertising should suffer less than other sorts. This week eMarketer, a market-research firm, predicted that online-advertising spending in America, which makes up about half the global total, will increase by 8.9% in 2009, rather than the 14.5% it had forecast in August. The firm thinks search advertising will grow by 14.9% and rich-media ads by 7.5%, whereas display ads will grow by 6.6%. In short, online advertising will continue to expand in the recession—just not as quickly as previously expected.
Enter the New York Times. In a provocatively titled post called "A Web Start-Up Counting on Ad Sales? Good Luck," with an even more linkbaity URL optimization of "are-free-ad-supported-web-sites-over," the author proceeds to write an article that seemingly has nothing to do with its edgy title.
The author starts with the case that you need traction to power an ad supported business model:
Advertising requires an audience, and that takes a few years to build. Web start-ups struggle with the question of whether to sacrifice revenue for several years, build a huge audience and then sell them ads, as YouTube did, or find an alternative revenue stream that will bring in money from day one.
From there, things start to get confusing. It seems that the author is trying to make the point that because the overall ad market is going down, it will now be much harder to get start-ups with no traction funded, because you can't just count on advertising as a future revenue stream:
The venture capitalists that back those start-ups have different philosophies, but as a group they have grown much more cautious about backing companies that have no immediate way to bring in some revenue.
Were companies with no traction getting funded before the downturn? I guess people like Marc Andreessen were, but folks like that seem to be the exception rather than the rule.
The author then seems to make the opposite point, by quoting Khosla Ventures David Weiden:
David Weiden, the Khosla Ventures partner who heads up tech investments for the firm, is not worried about advertising’s vulnerability — it will take a hit, he predicts, but Web sites will still be able to sell ad space.
And then:
“The ad model is somewhat worse but not radically worse,” he said. “What’s worse is getting funded that way.” If a company approaches investors with a plan to lose money for three or four years while building an audience, it will encounter many closed doors, he said. “It’s gone from plausible to almost implausible.”
From where I'm sitting, online advertising seems to be one of the few business models that is NOT falling off a cliff. My employer's CPM numbers are up year over year, as are those of other entrepreneurs' that I talk to. The macro numbers seem to support this observation, if you believe The Economist or eMarketer.
Is now really the time to race to a "safer" B2B model, hire a sales force, and hitch your wagon to the enterprise sales cycle?
I understand that diversified revenue models are better than putting all of your eggs in one basket.
But now is not the time to make the case that businesses supported by online advertising are in jeopardy. If anything, network driven online advertising is the least risky revenue model available to startups in this particular downturn. Online CPMs are projected to rise during the downturn, embedding a bit of ad code in your pages requires zero overhead, and there is no indication that folks are going to stop browsing free sites during a downturn - while there are plenty of indications that enterprises are slashing their budgets.
Maybe I'm missing something, but I think that the NYT got this one almost precisely backwards.
