As I have mentioned previously, we are entering an overall advertising recession and even online advertising growth has slowed. Notes the LA Times in August:
“Advertisers have pulled back in a pretty meaningful
way, and display is feeling the brunt of it,” said Clay Moran, a
Stanford Group analyst who recently wrote a research report called
“Online Advertising: caution required.”In recent weeks:
* Yahoo Inc. Chief Executive Jerry Yang told analysts that demand for display advertising was “softening.”
* Online publisher Tech Target Inc. lowered its third-quarter
forecast, blaming “macroeconomic weakness in the U.S. and its impact on
advertising spending.”* Lending site Bankrate Inc. cut its 2008 guidance. CEO Thomas Evans
explained that the company had “continued to experience softness in
display advertising from several of our largest financial advertisers.”* Ad network ValueClick Inc., based in Westlake Village, blamed the
economy for a slowdown in display advertising, which led to a 6% drop
in its second-quarter profit.
What does this mean for startups? When advertising budgets dry up, three things happen:
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1. Advertisers buy what they know
This has two implications. The first is simply brand recognition. It
is much easier to make the case to buy media on a well known site. As a
result, scale matters. The leaders in both web 1.0 (AOL, Yahoo, Cnet
etc) and web 2.0 (Facebook, Myspace, Rockyou*, Digg etc) will continue
to see high demand for their advertising inventory.
As the web 1.0 leaders are already at scale, they may see greater
negative effects from the overall market, but there will continue to be
a strong core of demand. Many of the web 2.0 companies have grown out
their traffic and brand in advance of their sales forces, so they may
be able to ride the growth of their sales teams to better mitigate the
market effects.
But being big (5m+ UU/mth), and a leader in your category, will help a lot.
The second implication is that advertisers will continue to buy
advertising against targeted content. Advertisers are used to buying
content adjacencies. Targeting
against users (whether behavioral or demographic targeting) can’t be
counted on to lift CPMs in the next couple of years.
Sites with highly targeted content that attracts endemic advertisers (Flixster*, iLike, Streetfire.net* etc) or demographic clusters (TMZ, PopSugar, AskMen etc) will be better off than broad reach sites.
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2. Experimental budgets are the first to get cut.
In an ad recession, advertisers appetite for experimentation is low. They like to stick to the established ad standards. New forms of advertising are hard. Startups whose sales processes feel more like business development than selling off of a rate card may have a tougher time.
Companies selling standard ad units will weather the recession better than those that have unique ad units.
- 3. Marketers keep funding direct response advertising.
The brightest spot in an ad recession is direct response. As Ad Age notes:
Many analysts now agree that when marketing budgets come
under pressure in a stressed economy, those sectors that can best
document their connection to ROI, such as search-engine advertising,
are far more attractive to corporate chiefs than other kinds of
less-trackable traditional advertising.
Direct marketers will continue to spend to acquire customers if that spend can be directly tracked to a sale. Lead gen companies (Quinn Street, Tippit*, LowerMyBills etc) will hold up better, as will companies with CPC and CPA models
(Google, TripAdvisor, $uperRewards, etc). However, they may also be
affected if the overall number of people “in market” goes down, or
prospective buyers become less likely to buy, due to the overall
economy slowing down.
Who will have it toughest? Sites that are sub scale (<1m UU month), with no targeted content AND selling custom ad units are going to have to work the hardest over the next few years. Great teams always find a way, but the road may be long and hard.
What are your thoughts as to what sort of online media companies will survive the ad recession best?
* Rockyou, Flixster, Streetfire.net and Tippit are Lightspeed Portfolio companies.
(For more from Jeremy, visit his blog.)
