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You know it’s a recession when porn sales are down September 14, 2009

Posted by jeremyliew in porn, recession.
9 comments

The Economist notes that the pornography industry is going through hard times:

Most of the industry consists of small private production companies whose numbers are secret, but Mark Kernes, an editor at Adult Video News, a trade magazine, estimates that the American industry had some $6 billion in revenues in 2007, before the recession, mostly in DVD sales and rentals and some in internet subscriptions. Diane Duke, the director of the Free Speech Coalition, the adult industry’s trade group, thinks that revenues have fallen 30-50% during the past year. “One producer told me his revenue was down 80%,” she says.

It’s not just the recession though. Pornography is going through the same structural shifts that are putting music, video print and other content companies under pressure:

Piracy is the main problem. And the internet, with its copious free clips, is an increasingly viable alternative to the paid stuff. Pornography in general has become “like potato chips, everywhere and cheap, to be consumed and tossed,” says Ms Hartley. It’s not the same as in the golden age when she joined. “The industry will shrink and stay shrunken,” she reckons.

Not to mention the threat of user generated content…

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Which categories of advertiser are still buying online media? March 10, 2009

Posted by jeremyliew in advertising, Internet, recession.
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More from James Mitchell’s presentation last week:

Checks with large online buyers confirm the obvious – that discretionary and some lending-oriented financial verticals remain weak. Also, we do not forecast a speedy recovery of the auto sector, though comments from overseas manufacturers are encouraging, with brands such as Audi planning to double its online ad budget this year, despite sales trends.

Also encouraging are announcements from players in the hardest-hit verticals moving all ad spending online. For example, Century 21 Real Estate recently committed to moving 100% of its national ad campaigns to the Internet.

Surprisingly, financial categories such as insurance, refinancing, and deposit accounts remain strong, as financial institutions seek to raise capital and take share in fee-based businesses.

Also, education and books categories have been growing recently, with textbook retailers and continuing-education institutions such as the University of Phoenix seeking to capture counter-cyclical demand.

Mitchell also identified travel as a potential area of weakness as airlines cut back capacity. However, he noted that there is a lot of hotel inventory currently in development that would come online over the next two years. These new hotels and resorts would likely drive travel advertising to recover.

One other area that Mitchell noted may change in the future was pharmaceutical spending. While this has been holding up very well so far, he noted that some changes that the Obama administration is contemplating may limit pharmaceutical companies ability to advertise their products.

Other attendees noted entertainment advertising (particularly movies), advocacy advertising (political issue based advertising) and CPG (consumer packaged goods) as areas that are showing continued strength, and “green” as an area that could potentially show weakness.

Long term future still bright for online advertising March 8, 2009

Posted by jeremyliew in advertising, Internet, recession.
11 comments

James Mitchell, lead internet analyst for Goldman Sachs, presented to a group of around 100 internet and mobile media company CEOs that Lightspeed pulled together last week.

There is clearly near term gloom. Goldman is projecting internet advertising revenue to be flat in 2009 in the US, and to see just 4% growth world wide. However, Mitchell showed that there is still plenty of long term headroom for growth in the internet advertising market. He pointed out that in the US, internet advertising represents around 8% of all advertising today, and this could as much as double over time:

Experience overseas leads us to believe that as Internet penetration, broadband penetration, smartphones and mobile access, and general comfort with the Internet grow, so too will online advertising as a percentage of total advertising.

For example: Online advertising is 17% of total advertising in Korea, with search comprising 11% and display & other making up 6%. Korea reached 50% broadband penetration in 2001, when search advertising that year was about 2% of the total ad market. The US took until 2005 to reach those levels.

Similarly, in the UK, online advertising is 13% of total advertising. In the US, online was only about 8% of the total at the end of 2008. We believe that the US and UK will catch up with Korea, and that the rest of the world will gradually converge with developed Internet economies.

Further, we believe that the transition to online will occur more quickly in developing markets such as China, as advertisers “leapfrog” traditional forms of advertising and begin advertising solely or primarily online.

Search and Display internet advertising as % of total: US vs Korea

Search and Display internet advertising as % of total: US vs Korea

He speculated that online advertising share of all advertising could reach as high as 23% if a scalable advertising solution for social media could be found.

Clearly, the companies that make it through to the other side of this advertising recession will have plenty of growth left ahead of them.

Almost as many down rounds as up rounds in December 2008 March 4, 2009

Posted by jeremyliew in recession, VC, Venture Capital.
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Fenwick and West analyzed 128 venture financings completed in q4 2008 for companies headquartered in the bay area and found that there has been a significant increase in the proportion of down rounds, with this trend accelerating:

“During the fourth quarter, up rounds exceeded down rounds 54% to 33% with 13% flat, the lowest amount by which up rounds exceeded down rounds since the third quarter of 2004,” said Barry Kramer, partner in the firm and co-author of the survey.

“Perhaps more ominously,” he said, “down rounds increased each month through the quarter, and for December 2008, 45% of all financings were down rounds, compared to 48% up and 7% flat.”

Note that bolding – almost as many down rounds as up rounds in december! Additionally, they found that in q4:

  • 21% of B rounds were down rounds
    43% of C rounds were down rounds
    22% of D rounds were down rounds
  • It’s hard to tell how many data points go into these numbers, but the proportion of series C down rounds is especially notable. This may indicate that in the past couple of years a high proportion of B rounds were overpriced. A round pricing has historically been fairly consistent across the last 10 years, which may explain why there are fewer B down rounds.

    It is worth reading Fenwick’s full survey as it gives good data on the frequency of many other important venture financing terms such as particpating preferred, full ratchet dilution, multiple liquidation preferences etc.

    Where is there upside in ecommerce in this recession? February 23, 2009

    Posted by jeremyliew in Ecommerce, recession.
    8 comments

    Although Internet Retailer is reporting 20% ecommerce growth among the top 500 etailers in 2008 based on their preliminary survey returns, Comscore notes that there was actually a 3% decline in ecommerce sales in q4 2008. The later statistic seems to be more in line with most retailers experience. However, the prognosis is not equally bad across all categories. Comscore notes that some categories (sport and fitness, video games, consumer electronics and apparel) actually saw growth last quarter:

    comscore-ecommerce-growth-q4-2008

    Comscore speculates that this supports more “nesting” behavior in the recession.

    McKinsey (free registration required) looks at all consumer expenditure across the last two recessions (not just ecommerce) and also finds some areas that grow while others decline:

    mckinsey-chart-consumer-expenditure

    Which categories of ecommerce do you think will grow through this recession?

    Why online display advertising may be down in 2009. December 4, 2008

    Posted by jeremyliew in advertising, recession.
    9 comments

    Henry Blodget has been saying for some time that online display advertising will be down in 2009.

    For a year, we’ve listened to analysts passionately explain how online ad spending will power through any broader economic and advertising weakness. Eyeballs are moving online, this story went (goes), ad dollars will follow. Online advertising is accountable. Online advertising is the future. Blah, blah, blah.

    It’s time we woke up and faced reality. Online display-ad spending will fall in 2009, probably sharply. It will probably fall again in 2010…

    How bad will the online display ad market fare over the next couple of years? At this point, we would estimate at least a 10% drop next year and probably more. (20% is not inconceivable). Again, the overall market fell 25% from 2000-2002. There are many reasons why this falloff should not be be so extreme–namely, that half of online ad customers won’t go bankrupt this time. On the other hand, there are many reasons why this falloff could be worse: The general economy is going to get clobbered in this recession–something that didn’t happen last time.

    His projection is at odds with most other projections, which mostly see slowing growth. As PaidContent noted last week:

    Citing severe deterioration in the economy, eMarketer has dramatically reduced its 2009 online ad spending projections to only 8.9 percent growth, compared to the 14.5 percent gains it estimated in August. The revision was prompted by the latest Interactive Advertising Bureau and PricewaterhouseCoopers tally of online ad spending, which said last week that web-based advertising grew 11 percent in Q3 to $5.9 billion. And so, eMarketer now expects online ad spend to hit $25.7 billion next year, while it anticipates 2008 to finish up with $23.6 billion.

    I’ve been receptive to Blodget’s view for some time, but had not heard a good explanation for why online advertising may shrink. His projections had been based on extrapolating trendlines rather than on identifying the underlying cause of a drop in online spending.

    Today though, the chief digital officer for one of the big advertising agencies gave me a reason. He pointed out that with in ad recession, ad rates for traditional media have fallen dramatically. It’s now much cheaper to buy print, TV, radio and outdoor than it has been for some time. In an ad recession there is a flight to quality, and a flight to familiarity. Just as no one ever got fired for buying IBM computers in the 90s, so too, no media buyer is going to get fired for buying 30 second spots on ABC or full page ads in People. Especially when she is doing so at a big discount.

    This dynamic, coupled with lower overall budgets, could create a temporary reversal in the secular shift from offline media to online media. Brand advertising is most likely to be at risk because it isn’t measureable. Direct response advertising (including search) will continue to see online taking share from offline.

    As I’ve said before, it won’t be dark for all online media companies. Some online media companies will do better than others through this recession. But Blodget’s prediction just got a little bit more real for me.

    More signs of consumer discretionary spending slowdown, online feeling the impact November 12, 2008

    Posted by jeremyliew in Ecommerce, recession.
    1 comment so far

    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 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…

    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.

    So far it isn’t looking good. Comscore notes:

    A review of monthly retail e-commerce growth rates helps to further depict the slowdown in the U.S. retail economy. So far this year, retail e-commerce growth rates have fallen from levels of 18 to 20 percent observed during Q4 of 2007 to a growth rate of only 6 percent in Q3 2008. Since April, we have seen five consecutive months of declining growth rates. September’s 5-percent growth rate is the lowest recorded by comScore since it began tracking e-commerce sales in 2001.

    And further:

    In addition to reporting this data from comScore’s passively-observed behavioral panel, comScore surveyed more than 1,000 consumers in October 2008 to gather attitudes on the economy. The study revealed that the majority of consumers are fearful of the future, with 82 percent stating they are more afraid about the economic future than ever before. Additionally, only a quarter (26 percent) of respondents said they believe the economy will be ‘better’ a year from now.

    Online entertainment sales (music, movies and videos) were the worst affected, down 29% year on year in q3. These is the most discretionary of discretionary spending.

    And as for Starbucks, the WSJ notes:

    Starbucks Corp. said it will open fewer stores internationally than planned and offered a more pessimistic earnings forecast for the coming year as the coffee chain said fiscal fourth-quarter earnings plummeted 97%… Same-store sales, or those at locations open at least a year, declined 8% in the U.S.

    It doesn’t look like we will spend our way out of this recession

    Etailers will need to grow to counteract the slowing economy October 31, 2008

    Posted by jeremyliew in Ecommerce, recession.
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    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 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.

    So far it is looking like history may not repeat itself. As I noted earlier this week, consumer confidence is at an all time low, half the level of the trough in the last recession.

    I recently did an informal survey of etailers to see what impact the economic turmoil has been having on them. The results were generally pretty negative. Most etailers that had been in business more than 24 months were seeing results down from their projections since the middle of September. Consumers, watching the decline of their net worth both in the stock market and in their homes, have been deferring many of their purchases. Some of the more dire responses:

    “Our August Sales were X. Our September Sales, 2X/3 . The first ten days totaled X/3 but then right after that, sales dropped precipitously for the whole rest of September. My October Run Rate is X/2. My last year October sales were 4X/3. Big difference. Right after all of the banks went bankrupt and the media frenzy kicked in scaring everyone from buying, sales completely tanked to such a low level I could have never imagined it. This is not a recession for me…more of like a depression!”

    “We got our asses handed to us starting about [middle of Septemer]. Before that was Ok. And we checked with our vendors who sell through [discount department store] and [big box retailer] and they confirmed — [discount department store] down 45% week over week starting about last monday, [big box retailer] down 35%.

    So for us . . .
    4 weeks ago: fine
    3 weeks ago: fine
    2 weeks ago: conversion rates dropped 40%, along with revenue/transactions
    past week: the drop has stuck around.”

    The exceptions to this trend in the survey are businesses that are actively adding SKUs to their product offering. Growth is the antidote to the slowing economy. This growth could come from adding new stores or product lines, new distribution channels or marketing channels, but it won’t come from the overall rise in online spending that has bouyed the category for the last few years.

    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.
    15 comments

    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.

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