More on building an online media company to $50m in revenues

As my previous post indicated, it is not easy to build an online media company to $50m in revenue. Depending on whether you’re broad reach, demographically focused, or can support endemic advertisers, you need to get to top 10, top 25 or top 125 levels of US website traffic.

A couple of interesting studies have come out recently that underscore how difficult this can be.

At the Online Publishers Association’s Forum on the Future earlier this month, Marketspace (a consulting firm associated with Monitor) announced the results of their research which showed that 92% of 2006 gross online ad spend in the US went to only four companies; Google, Yahoo, MSN and AOL. Although some portion of that ad spend was subsequently distributed to independent sites through ad networks (e.g. AOL’s Advertising.com, Google’s Adsense, Yahoo’s Publisher Network etc), that is a big proportion of the total. Furthermore, that is an INCREASE from the 88% that went to those four companies in 2005.

Now According to the IAB and PwC, internet advertising revenues for 2006 were estimated to be $16.8 billion, a 34 percent increase over $12.5 billion in 2005. So doing the math, that suggests that the online advertising that didn’t go to the big four actually DECREASED from $1.5bn in 2005 to $1.34bn in 2006.

For companies in the broad reach/$1 RPM bucket, this probably doesn’t matter much. Ad networks owned by the big four sell a lot of their advertising anyway. But for companies that target endemic advertisers, this is sobering information. To be able to realize RPMs in the $20 range, companies will need to have their own sales force. And if these numbers are to be believed, this sales force is actually competing for a share of a slightly shrinking pie.

These numbers don’t quite match to the numbers in Avenue A/Razorfish’s 2007 Digital Outlook report, which is well summarized at Paidcontent, but they agree directionally. Avenue A says that portals have increased their share of online ad spend by 85% from 2005 to 2006, from 13% of overall ad spend to 24%. (This report breaks out search and ad networks separately – the big four would be a combination of these categories).

It would appear that advertisers are seeking consolidation in their spending patterns.

This isn’t entirely a doom and gloom story – online advertising revenue as a class is still growing at 34%, and $1.34bn of online ad spend among the independents is still plenty of revenue to go around. But it does underscore the need for websites to have a compelling story for advertisers, both about user targeting and about volume of traffic.