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Summary:

Jason Calacanis, a good friend of ours, is doing the cartwheels over the third quarter (2006) online advertising data released by the Interactive Advertising Bureau. (I say cartwheels because, a few months ago, he was the most vocal critic of my story for Business 2.0, about […]

Jason Calacanis, a good friend of ours, is doing the cartwheels over the third quarter (2006) online advertising data released by the Interactive Advertising Bureau. (I say cartwheels because, a few months ago, he was the most vocal critic of my story for Business 2.0, about the return of the Eyeballs.)

Why bring it up? Because online advertising is driven by eyeballs, which then leads to people acting on them as in the case of Google ads, or display-style advertising. The $4.2 billion is impressive — and not a surprise. Jason is proclaiming that this boom will continue for another 20 years, and it will keep going up and up. He says, the real story of Web 2.0 is advertising 2.0. He is right, and wrong.

He is right because as online video becomes more popular, the advertising dollars are going to shift to this nascent medium. Those dollars will qualify as Internet advertising, of course. He is wrong, because he is conveniently overlooking the fact that the sequential growth in advertising was essentially flat. “Online advertising will be a useful marketing tool, but no trend goes in a straight line for twenty years,” writes Carl Howe, in his excellent analysis.

Calacanis overlooks the fact that a disproportionate portion of the online advertising dollars is flying into the pockets of a handful of companies. A back of the envelope calculation shows that in the third quarter Yahoo and Google accounted for $2 billion (give or take a few million dollars) in total dollars spent on online advertising in the third quarter 2006. (This is after traffic acquisition costs, and factoring in their international contribution to their total revenues.)

Rest of the money – about $2.2 billion – is being shared by hundreds of web properties – everyone from big media owned properties to little tiny blogs like ours shared that pot of gold. Unless you are AOL, Facebook or MySpace, those advertising dollars don’t add up to all that much.

These big numbers are also creating a false sense of security for start-ups, and the venture capitalist community that is so willing to invest big money in utterly forgettable wiki sites.

Just for kicks, in the third quarter about $455 million was invested in Web 2.0 companies. That’s about $4.70 ad-dollars per VC dollar invested in these companies.

  1. Lies, Damn Lies and Advertising…

    In the last 2 evenings I have attended two events focusing on Social Media, and the striking thing about these compared to the ones I attended a few months ago is that they are no longer populated by geeks, but increasingly by Advertising and PR people…

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  2. I have not seen ads in years, outside of my email account.

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  3. Om

    I completely agree with you. This trend is giving too many startups a false sense of security which is making them rush into launch without a proper business model. It reminds me a lot of 96, when people depended solely on ad revenue with no alternative revenue model. On a similar note, look out for netus.com in the next few months. We have an interesting approach to advertising that could prove to be a very interesting revenue model in the long run. Great post!

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  4. Being part of a startup right now, I 100% agree with what you are saying. By depending on advertising to generate revenue, it shows that people did not learn from the last .com craze. The main priority for our venture was to develop a proven model that will generate revenue not based on advertising. You can be more successful by having a proven business model rather than just pure advertising.

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  5. The increase in ad spending is a metric for whether there is any profitable business model that can be applied to Web 2.0, not that it should be the only part of a business model. In Web 1.0, may firms did not focus on profitability until a forecasted point many years in the future. In Web 2.0, though ad spending is not going to support many firms, the ability to bring in some revenue from it demonstrates that everyone has faced the reality that some revenue is better than Zero revenue. (from Kevin at TasteTV,(http://www.TasteTV.com). Video Ads just started running on our site last week. Will they make us gazillionnaires? Unlikely. But we like having them available.

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  6. I would add AOL, MSN, Fox, and CNET to that calculation and you’ve got the majority of advertising going to the big companies.

    If you add back the traffic acquisition numbers you took out the majority of advertising flows through the big Internet companies.

    As time goes on this will get even more pronounced because small companies will not even try and sell their ads–they’ll outsource it (you wouldn’t know about that right :-)

    Big advertisers want big audience… they go for scale. So, Web 2.0 companies–aka startups–shouldn’t expect this advertising shift to just show up at their door. The big get bigger, and the little guy gets squeezed–that’s the way of the world.

    In terms of the distance between eyeballs and revenue you’re winning that argument ever since Google backed up the truck for MySpace’s and YouTube’s search inventory.

    Anyway, let’s take that second graph I did and extend it out five and ten years… if it’s within 15% of the line dinner and cigars are on you, it’s it’s below by more than 15% dinner and cigars on me.

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  7. Even if the total ad dollars remain flat, there sure seem to a big shift from all other media to Online. A recent AAF study reports that ad executives expect a significant portion of broadcast and cable TV ad dollars to shift to online video by 2010, with 33% predicting that switch will be between 10% and 19%.

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  8. If everyone could see what you see the world would obviously be a different place. The reality is that, most people regradless of position react to the wisdom of the day. Visionaries provide entertainment value, but final decisions are still made based on past success. If anyone examined the root causation of social networks and saw that they serve to address our basic human need to be acknowledged, then “registered users” wouldn’t drive acquisitions like MySpace. But that’s not what happens, and I suspect that is not what’s going to happen in the future. For people who can see past the hype, the best we can do is play along and leverage our vision when failure makes decision makers open to next ideas…

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  9. @ Jason re Big Internet Advertising Co’s getting bigger

    Surely this is only true so long as (i) they can better identify the relevance of an online Ad to a potential customer and (ii) the cost of Ad production is high enough to force “big batch” Ad distribution?

    One can imagine a world where there are a lot of vertical plays much more in tune with customers, and where it is possible to create tailored Ad media very quickly and cheaply for them.

    Lower the setup cost of Ad production and you lower the batch size, allowing you to tailor the product to user far more.

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  10. great stuff – is anyone aware of numbers such as eyeballs = revenue? or a valuation for eyeball aquisition – i remember reading something like $36 per eyeball – but have never really seen anything for ad revenue per eyeball…

    i also would second what alan wrote about vertacles becoming more relevant to where the dollars go in the future – this is the real lure for advertisers.

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