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Summary:

Last week, Silicon Valley woke up to find itself caught in the death grip of the credit crunch. As to which sector is going to get hit the hardest, the consensus so far is: advertising. Continue Reading.

Last week, after ignoring the world’s financial problems for almost a year, Silicon Valley woke up to find itself caught in the death grip of the credit crunch. Declining stock markets only added to the overall gloom. And when one of its own — Sequoia Capital, among the smartest and most rational investors in the world — told its portfolio companies to cinch their belts tighter than ever, all hell broke loose.

Those of us in the Valley are now reassessing our bullishness and trying to quickly figure out which sectors are going to get hit the hardest. The consensus that is fast emerging? Advertising.

And yes, that does include online advertising — even if it is likely to recover first. Regardless of the timeline involved, the destruction that will follow is going to be on a massive scale, as it will take down any number of poorly funded startups whose fortunes depend on those ad dollars.

In a sobering and harsh analysis sent to his clients, UBS analyst Ben Schachter said online advertising network ValueClick would be among those negatively affected. Using that as a proxy for the “advertising network” business, it’s safe to assume that dozens of advertising networks that have cropped up over the past two years will be impacted.

The economic problems are much wider and deeper than most people realize. The sub-prime mortgage industry lit a fire not only under the housing market but under consumer spending as well. All that spending led to big-time advertising on the part of consumer companies and, as those revenues worked their way across the entire technology food chain, healthy ad spending spread to even decidedly non-consumer areas.

The boom was particularly evident on the web, where it helped to spawn a whole slew of ad-supported ventures such as social networks, video sites and other web services. Now, however, we are moving in the opposite direction. Consumer spending is starting to fall, and the long-term prognosis isn’t pretty.

As Schachter wrote, “[W]e see no business model based on advertising or consumer spending that will be immune to a downturn. Specifically for the advertising names, as corporate profit forecasts come down, we expect planned advertising spending will be delayed and/or cut.”

The problem isn’t limited to smaller players. Yahoo, for example, which is heavily dependent on display advertising from the financial and automobile sectors, is very vulnerable and might soon face a day of reckoning. Viacom slashed its full-year earnings forecast Friday afternoon, citing the softening ad market. The only ad-related company that looks like something of a safe place amidst this chaos is Google, thanks largely to its performance-based advertising system, which allows advertisers to only pay for what brings them returns.

For the rest of us, the era of sleepless nights has begun.

This article also appeared on Businessweek.com.

  1. In a completely unexpected turn of fate, it seems that there is an on-line advertising sector that is emerging that will survive, nay thrive, even in this slackening. The clients that I specialize in, specialist verticals and technical skilled trades and manufacturing, are just getting wise to the targeted display and widget ad programs. Go figure.

    These mid-sized businesses took a long time to get wise to the possibilities, but they are starting to ripen – maybe just in time. But there is only one of me, and many ad and social targeting networks, so I may have my hands full tailoring some of these campaigns for the slightly more modestly scaled budgets of these clients. Even though these mid sized corps have less dollars, their campaigns are more modest, and there are just more of them in pure numbers than the Multinational brands.

    Just as the economy is softening, these local and regional specialty service orgs and technical manufacturers are turning into real channels. It would be a shame of some of the ad nets and widget white label social API services keep dragging their feet. In my humble opinion, they should be far more agile and receptive to the mid range consultants, like myself, and hop to when the call comes to work up cooperative bids and specs. So far, they are cold to this mid-range segment, making me do ALL the heavy lifting.

    Maybe some period of starvation will bring them around to the see the light that the SME and us local / regional technical liaisons can fill the breach.

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  2. [...] announcement comes at a time when the advertising market — both online and off — is looking a little shaky because of widespread economic [...]

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  3. Companies are going to target their reduced advertising budgets more carefully. I don’t think that you’re going to see a proportional shift away the internet as a medium – the people that use it aren’t going to stop using it and start watching more TV. But you will see companies preferring established presences with a demonstrated audience. I think Yahoo will do OK. But in preferring established players, your average “lets try something cool and social and yeah, we’ll monetise it with advertising” is going to cop it.

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  4. @Allen and Alan

    You make good points but I think a lot of us are not taking into account the aggregate amount of $$$s lost from advertising in general. Online is going to suffer some in the near term, and we might see the negativity first hand towards the end of the first quarter. However, if all goes well, the online advertising market is going to recover by end of Q3 2009. Part of the cycle.

    @Allen, your last statement echoes my sentiments

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  5. I’m not sure if this is a subjective thing, but I think I actually “feel” the change already, with more and more crappy AdSense ads showing up on our web sites.
    We already received complaints from users about that.

    On the mid term, for ad-revenue-based start-ups this is the hour of bootstrapped start-ups with the founders having kept their day-jobs. They will be able to dive through this crisis as they’re not that much dependent on the ad market and will be the first to profit from it when it’s back on track.

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  6. This crisis my friend will transform Google from being a Media Company to a Computing/Software company and will make a better case for Google to move into Cloud Computing more seriously.

    Where are the next big trends:
    1. Move to Expense as Compared to Capital investment – Cloud Computing
    2. Improve Customer Satisfaction as opposed to grow customer base – Less Add Spent , more operational upgrades.

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  7. Maybe we get better tools for comparing products out of this. I mean if you try to compare products today, be it cars or TVs. You look at the major shopping sites and all products seem to be the same, since they standardized product info into a very limited category driven RDBMS. You end up reading reviews to find out what a product really can do or not. Good for search and review sites, waste of time for consumers. Waste of time, since you still have to figure out whom you trust. Good for Om.
    In general I think it will be bad for display ads, brand making and brand stimulus marketing. Old media since they can not directly identify who is looking for something and what. Or new media which doesn’t do it.

    My guess is, media which can identify what a consumer is up to will do better then generalized advertising. And by that definition will come early out of this market, since the consumer will start looking for goods before the market as a whole realizes it.

    Om, you did read my mail about information, did you?

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  8. The credit crunch is opening up some weird old markets. The London Sunday Times reported yesterday a 250% rise in sales of hot water bottles! These niches are bound to result in ad spend online, but perhaps advertisers need to look harder at what spooked consumers and businesses are thinking – tailor their messages better – to get a better return on their spend. Using the web to interact and transact is much thriftier than getting in the car or on the phone. Consumers will be driven to use the web more than ever – it’s capturing them through new messaging that will be key.

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  9. For a quick sense of the circularity in the online advertising industry, have a look at the ads on this site. A lot of ad spending is by companies that themselves depend on ad revenue, either directly or indirectly. From some 2006 figures I had handy, 7% of Internet ad spending was for “media” products, presumably advertising to get people to come look at their ads. 5% was for computer/software and 15% was for Telecom and Internet services.

    Clearly, there must be some external money feeding this ecosystem. Ah there it is: Financial Services, 15% of all Internet ad spending in 2006. This is going to be a vicious spiral.

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  10. Om,
    We have seen this before (late 2000-2003). Established brands like yourselves should be ok.
    About 6 months ago at a kids birthday party a recent MBA from a top business school was talking how “targeted” ads would improve my lifestyle – that told me that we were on the top of the market.
    -A

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  11. Even though online advertising will be OK in the long run, we are naive to think that it won’t suffer in the short term. When companies cut their overall ad budgets, they don’t necessarily say “online performs better than tv, so keep online.” In a lot of cases — including google adwords — you can turn off online advertising with the click of a button. You can’t do that with TV advertising you committed to 6 months ago.

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  12. @ronald… i agree with you the general plain vanilla banner ads will get a bit of shellacking. Also, yes I did get your email and well I am seriously swamped under email crush so it might be a while before I reply.

    @austinandrew… good point. I think real time control over ad plans is going to help online ads recover faster.

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  13. [...] by Om’s post today, I’m still undecided about what happens to on-line ads, in particular what happens to the big [...]

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  14. I’m still undecided about what happens to on-line ads, in particular what happens to the big gorilla, Google ads.

    On the one hand, I tell myself Google’s ad business will be hurt badly because companies will be cutting back.

    On the other hand, one could also argue that with layoffs, and more people having to resort to working from home etc. Google offers the only low barrier to entry option, so Google advertising will increase like never before.

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  15. [...] And at the biggest point gain ever, the Dow upped 976 points.  While my fellow tech bloggers are reporting how bad the economic crisis is for tech companies, they started making a recovery [...]

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  16. [...] Sarah Lacy talked to me about Gartner’s tech spending forecast, the slowing ad market and, well, the world at large. I am taking a very cautious stance on the technology business for [...]

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  17. so if you were to go back in time and look at some of the large ad buys – like myspace search engine placement, facebook search placement (google and ms etc), what would peg them at today? as in, how much is going to be lost – or how much longer to realize gains?

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  18. GigaOm serves fairly niche markets. You might be fine on the ad side. One area I’d watch: events. There are so many events tapping into a cash-crunched base. Event attendance might track down 20% or more. Come up with creative ways to fill the gap.

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  19. [...] Dude, Where’s My Ad?, Om Malik.”For the rest of us, the era of sleepless nights has begun.” [...]

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  20. @austinandrew

    “In a lot of cases — including google adwords — you can turn off online advertising with the click of a button. You can’t do that with TV advertising you committed to 6 months ago.”

    Generally in most cases TV advertising has easier cancellation policies than online. TV is generally extremely flexible in terms of cancellation or delete and charge. Online not so much.

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  21. [...] your product a problem solver, otherwise the deadpool is behind the corner. And don’t tell me advertising is your business model. [...]

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  22. [...] – a good proxy for application developers. And perhaps an indication of where companies will be looking to place their ads throughout the economic [...]

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  23. [...] toll on the social media industry, whether it’s in the mood on Sand Hill, in the decline of online advertising, or even in the prognosis for Web 2.0 at large. I’d like to attempt to capture the basics of [...]

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  24. [...] Om Malik announced his blog network GigaOm had raised $4.5 million in funding, he penned a blog post on how ad-based businesses would be the hardest hit in tech. So as an entrepreneur is Malik [...]

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  25. [...] Malik | Thursday, December 18, 2008 | 8:32 PM PT | 0 comments We know things are bad in the ad-world. It is just that things are even worse for folks who were too reliant on automobile advertising. [...]

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