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Which companies might prosper in an ad recession? October 13, 2008

Posted by jeremyliew in advertising, Ecommerce, freemium, gaming, Lead gen, recession, subscription, virtual goods.
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I have previously posted on which online media companies will survive the ad recession. Clearly, all online media companies will feel the advertising recession, but some companies will hold up better than others.

But some companies might do more than survive – they might prosper. Companies that buy advertising (rather than selling it) will find that they can now buy advertising more cheaply than previously.

Ecommerce companies, subscription businesses, lead gen businesses and online game companies are all buyers of online advertising. In the last advertising slowdown, companies like Expedia, Zappos, Quin Street, Lending Tree, Lower My Bills, Netflix, Classmates.com and Ancestry.com were all able to grow to over $100M in revenue by taking advantage of cheap media.

Will history repeat itself in this recession? It is hard to know. Certainly lower CPMs can lead to lower customer acquisition costs if all else is equal. But the difference between this recession and the last one is consumer confidence, which is markedly lower today than in the 2000-2003 time period. As a result, there may simply be less buyers out there to acquire. Compete recently noted the marked drop in “in market auto buyers” over the last two years for example – down 37%:

Certainly, consumers are deferring “considered purchases” including homes, cars and other big ticket items. Etailers selling “necessities” that cannot be deferred, such as diapers or business cards, will do fine. The question is what will happen to the demand for small ticket consumer discretionary spending. Starbucks might be considered a proxy for this sort of spending. Unfortunately, the news for Starbucks isn’t good. Notes Seeking Alpha:

There was a time when getting a coffee at Starbucks Corp. (SBUX) – whether a basic “tall bold” or a souped-up venti concoction – was considered a relatively cheap treat, though those of us with a daily Starbucks habit might think otherwise.

However, a report from RBC Capital Markets analyst Larry Miller indicates that even that daily cup of store-bought java is one of the victims of the credit crunch. Mr. Miller lowered his 2009 earnings estimates – to $0.90 from $0.95, and said:

[The move] reflects our proprietary survey work, which suggests Starbucks sales continue to weaken as consumers are changing their habits and brewing more coffee at home.

This does not bode well for small ticket discretionary spending.

One potential brightspot may be gaming. The games industry has historically been considered counter cyclical. The argument has been that for $50s you can buy a game that will give you 50-100 hours of enjoyment, versus $10 for a 2 hour movie or $5 for a magazine that you’ll finish in an hour. Free to play games make this argument even more compelling. Free to play games may be able to take advantage of cheaper customer acquisition costs in an advertising recession.

For other forms of discretionary small ticket spending, the jury may still be out.

Comments»

1. ted tagami - October 13, 2008

Jeremy,

I like your prognostication and hope that it is true!

2. spanky - October 13, 2008

Let’s hope virtual worlds behave like games and are counter cyclical. :)

3. amisare - October 13, 2008

There will also be more time rich people, or people who become more time rich….

4. piggly wiggly - October 15, 2008

One difference from last downturn was that the search market was much less mature; making keyword auctions less competitive and therefore CPCs lower. That was as much a secular story as a cyclical one. Also, as you said, the main factor will be consumer demand. Ad markets don’t decline unilaterally. They decline as a result of declining consumer demand, which is never good for marketers, regardless of declining ad rates.

5. Philip James - October 15, 2008

Most vices are counter cyclical, so companies involved in alcohol (or wine, like we are), gambling, pornography. Especially those based on lead gen etc should be in a great spot.

6. Which online media companies will survive the ad recession? « Lightspeed Venture Partners Blog - October 15, 2008

[...] UPDATE: Which companies might benefit from an online ad recession? * Rockyou, Flixster, Streetfire.net and Tippit are Lightspeed Portfolio [...]

7. Nate Pagel - October 16, 2008

re: “Expedia, Zappos, Quin Street, Lending Tree, Lower My Bills, Netflix, Classmates.com and Ancestry.com were all able to grow to over $100M in revenue by taking advantage of cheap media.”

We are seeing a 3 of these come back to the table to spend more potentially and the online EDU’s (absent form your list – though they should def. be in there) ramp as well. People go back to school in droves during a recession…. (The financial folks we don’t expect to see too much of….)

8. kingstonchronicle - October 17, 2008

Wild guess would be NETFLIX.

9. J.T. - October 21, 2008

Somewhat in line with kingstonchronicle’s comment, I’d fully expect to see Gamefly to show nice Q4 growth between the glut of top-tier titles dropping over the next month and a half and the perception of hard times ahead forcing more consideration around monthly budgets.

As with most subscription models, they could well expect to see folks continue their subscriptions well into the next year with auto-renew being easier to keep than deal with when the price tag is only ~ $16 per month. It’s even conceivable that there will be a higher proportion of subscribers jumping in at the $22 price point to get an extra game.

The challenge would seem to be preparing for the uptick with increased inventory of high-demand titles while hoping that the ROI per copy can be floated by a high enough purchase rate at the end of the period (although, depending on the average duration of each rental and the application of the sub fees… but I’ve digressed terribly and need to get back to work).

10. Etailers will need to grow to counteract the slowing economy « Lightspeed Venture Partners Blog - October 31, 2008

[...] 31, 2008 Posted by jeremyliew in Ecommerce, recession. trackback Earlier this month I wondered which companies might prosper in an advertising recession. But some companies might do more than survive – they might prosper. Companies that buy [...]

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12. More signs of consumer discretionary spending slowdown, online feeling the impact « Lightspeed Venture Partners Blog - November 12, 2008

[...] November 12, 2008 Posted by jeremyliew in Ecommerce, recession. trackback Last month I wondered which companies might prosper in an advertising recession: Companies that buy advertising (rather than selling it) will find that they can now buy [...]

13. V - December 11, 2008

Does anyone have any data on subscription growth/decline numbers for Club Penguin or other kids virtual worlds for 2008?

14. A New Economy, A New Consumer « Todd Perelmuter’s Ad Blog - March 25, 2009

[...] the last advertising slowdown, companies like Netflix, Expedia, and Zappos managed to grow over $100 million in revenue by taking advantage of cheap media. The current recession, however, is not only going to lower the [...]

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