The contention is that:
1. Most web2 business models rely on advertising
2. The advertising market is barmy at the moment; agencies, buyers & brand managers don’t quite know what to do.
3. Hundreds of web2.0 companies are essentially making a wide range of very different bets on the type of web property will command top dollar from advertisers.
4. Not many will get it right.
I first said something along these lines at the Essential Web conference a few months ago, and I have been getting a hard time from some quarters so want to explain.
Firstly I will talk about exits for these web properties and then about their business models:
Since joining Advent I have been asking a lot of people their view on who corporates will be acquiring and IPOs be valuing highly in 3 – 5 years.
These valuations are predicated on our old friend “first mover advantage”: Could News International develop their own job-site? They could, but why not just buy someone already doing it? It saves the time, risk, outlay and focus (like this). Admittedly there is also a fair degree of panic on the part of some media companies that they don’t have a large or strong enough online audience.
Will web properties still be madly buying like this in 3 years? I don’t think so.
By that point, it is all about monetization. This is not to say they’ll be straight EBITDA valuations but exits (both M&A and IPOs) will be based on studies of the methods and metrics of monetization.
And so to start ups. When I look at some of the advertising-based monetization models from some start ups I meet, I get very nervous. For example, will you really be able to hit the $40 CPM 2 years after launch on remnant inventory? Will you really be able to gross £135 for every warmish lead you give to that high street solicitor?
Other than this granular view, there is also a more strategic view. Consider this:
1) There is a MASSIVE increase in ad space coming online (from start-ups, through the new dominants (like Facebook) through to the old school giants like FT.com).
2) There is only a MILD up-tick in online ad spending.
At a basic level the law of supply and demand says that price will go down.
(There is a further possibility of consumer spending falling off a cliff, but with the current market poised where it is, who can call this one?)
The end for ad-based web models?
Not at all. I’m as bullish as ever on making investment into ad-driven web models.
I just think that most of the businesses setting up to today have got it wrong.
What I’m really excited about seeing is how the ad market is becoming more sophisticated and how some start-ups are taking advantage of these new models. All of this is based on some research we’ve been doing in-house and over loads of coffees and breakfasts (I am a stone heavier since April).
We have found a number of key ideas that seem to be moving the world of online and offline marketing. Brace yourselves for a stack of posts over the coming weeks with my conclusions...