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.
Google is making it harder for vertical search engines September 24, 2007
Posted by jeremyliew in advertising, arbitrage, business models, google, Lead gen, Search.8 comments
DavidZHawk asks, “What if Google Declared War on Comparison Shopping Engines and No One Noticed?” and points to an Inside Adwords blog post (my bolding):
The following types of websites are likely to merit low landing page quality scores and may be difficult to advertise affordably. In addition, it’s important for advertisers of these types of websites to adhere to our landing page quality guidelines regarding unique content.
* eBook sites that show frequent ads
* ‘Get rich quick’ sites
* Comparison shopping sites
* Travel aggregators
* Affiliates that don’t comply with our affiliate guidelines
Comparison shopping sites and travel aggregators are just two classes of the many flavors of vertical search engine, although they monetize better than most because of the high proportion of transactional search queries. As a result they have been able to afford to buy traffic through Seach Engine Marketing (SEM) where other vertical search engines have not been able to afford to due to lower monetization rates.
When you combine this move to send less traffic to vertical search engines with Google’s more aggressive inclusion of “One Box” search results from Froogle and their other owned vertical search efforts, you start to wonder if Google is looking to keep more of its traffic recirculating within its own properties. iGoogle and Gmail were the first signs that Google might aspire to keep control of more of the traffic that starts there.
Web 2.0 marks the decline of Ebay and Amazon March 26, 2007
Posted by ravimhatre in Consumer internet, Ecommerce, Internet, Lead gen, Search, start-up, web 2.0.12 comments
Om Malik is on to an important trend in his recent post regarding the marginalization of Ebay, Amazon and other legacy ecommerce marketplaces with the advent of e-commerce 2.0. Given the emergence of new and better merchandising technologies, more intuitive and comprehensive product search services, and the proliferation of contextual and performance-based advertising channels, small and mid-sized merchants are able to establish rapidly growing web outlets more easily than ever before.
In the first generation of ecommerce, marketplaces with recognizable consumer brands (like Ebay and Amazon) could offer small and mid-sized merchants access to large pools of customers. However, there was a significant premium charged for this access – usually 10 or more percent of the transaction price. Bear in mind that the typical merchant will have total gross margins of no more than 20-30 percent.
Like many net-based ecosystems we’re now witnessing the emergence of an open environment to replace first generation “closed” marketplaces or communities. Instead of listing on Ebay or Amazon and relying on their brand to attract customers and their standardized merchandising and search to drive purchases, a merchant can now easily build a product website that will drive organic traffic from vertical and horizontal search engines picking up their unique product content and also utilize a variety of performance based advertising channels including comparision shopping lead-gen sites (the top 10 sites delivered over 100 Million shopping leads to merchants in January 2007) as well as search engine keyword marketing to acquire new customers. These channels are less expensive and drive significantly more customers and purchases at higher margins than legacy marketplaces.
From a VC perspective, we believe a key requirement to making this work is the emergence of next-generation product search services that tame the Internet’s infinite shelf-space and provide consumers with truly comprehensive product search results through an interface that is highly intuitive and digestable. Several start-ups are intensely working to solve this problem such as TheFind (LSVP portfolio company) Become, and ShopWiki. Let us know what you think of their services.
Google CPA will crunch lead gen arbitrageurs margins further March 21, 2007
Posted by jeremyliew in advertising, Consumer internet, Lead gen, Search, start-up, startups.19 comments
Today’s release of Google’s Cost-Per-Action (CPA) beta has generated a lot of attention. Most are focusing on the impact on affiliate networks such as Commission Junction or Link Share as the test is currently confined to Adsense ads that show up on the Google Publisher Network.
I’m waiting for the other shoe to drop. The next logical step is to have these CPA ads show up as Adwords next to Google’s search results.
This presents a direct and present threat to many lead gen businesses, especially those that rely on CPC to CPA arbitrage as their business. I posted on the future of lead gen in January, where I noted that, simplifying substantially, lead gen comprises three processes:
1. Acquiring traffic (e.g. from paid search, organic search, brand advertising, banner advertising, distribution deals etc).
2. Converting traffic to leads through a form-fill process
3. Finding the highest value for a lead among multiple buyers (ie having a network of advertisers and knowing who placed what value on each lead)
Google’s current beta will essentially eliminate the arbitrage opportunities in part one of this value chain. Companies driving the majority of their traffic from organic search and (long term) distribution deals will be less affected, as will those who add value to the process by qualifying users and directing them to the best matched vendors as leads. But those whose core competencies are in clever media buying will be pressured because a CPA model shifts the risk out of buying CPC and CPM media and converting to lead forms.
There are a large number of lead gen companies that have grown to over $100m in revenue. These have grown to their current size by being well managed, and building multiple sources of traffic and an efficient mechanism for matching leads to their highest value.
Smaller “mom and pop” lead gen shops that depending on buying traffic through banner advertising and CPC advertising to landing pages and selling these leads to a small network of buyers will find their margins under increasing pressure if their clients can disintermediate them through Google’s new products.
UPDATE: Some very insightful responses posted in comments that I will attempt to summarize as “you’re assuming more efficiency exists than actually does, thats why this will still create a lot of value”. Its a fair point. If you read this in RSS, its worth reading the comments.
More on building an online media company to $50m in revenues March 14, 2007
Posted by jeremyliew in advertising, Consumer internet, Internet, Lead gen, start-up, startups, VC, Venture Capital, web 2.0.15 comments
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.
New forms of advertising are hard February 19, 2007
Posted by jeremyliew in advertising, Consumer internet, Digital Media, Internet, Lead gen, Search, start-up, startups, web 2.0.25 comments
I’ve seen a few startups recently that are relying on launching a new form of advertising as their business model. These can include product placements, sponsorships of various flavors, new forms of local advertising, interactive out-of-home advertising, and lots of variations of mobile advertising. This is a hard business. If successful, it can be very, very successful (e.g. Overture/Google with sponsored links in search) but entrepreneurs often underestimate how long it will take for revenues to ramp.
To understand how new forms of advertising get adopted, you need to understand how advertising is bought today. In most instances, ad agencies control the ad budgets for the largest advertisers in the world. Within those ad agencies, one of the functions is media buying. A media buyer’s role is to optimize reach (and sometimes quality of audience) for their client across all possible advertising channels. The problem with new forms of advertising is that they are often not represented in the media buyers’ spreadsheets and models. And if it’s not in the model, it doesn’t get allocated any ad spend.
Startups sometimes get traction with a new form of advertising because there are always some forward thinking advertiers who are willing to experiment. This early traction is often a customized program negotiated with an advertiser that is friendly with the startup through personal relationships. However, crossing over from a “business development” focused model (where each new deal is custom crafted) to an “ad sales” focused model (where standardized products are sold off of a rate card) is the key to massive scalability of revenues. To do this you need to get into the media buying model; you need to sell a standardized product.
For internet companies, that usually means that you need to get the IAB (Internet Advertising Bureau) to issue a new “Standard” ad unit, in much the same way that the IAB issued its first set of “voluntary guidelines” that set up 8 standard banner ad units in 1996, a massive reduction from the over 150 ad sizes that were in use at the time. This standardization greatly eases logistical complexity for both advertiers and media companies.
The process of creating a new standard can be quite a lengthy one. It usually involves a coalition of both media companies and advertisers coming together and negotiating the key elements of the standard. The composition of the IAB board is usually dominated by larger online media companies and it can be hard for a startup to have much influence on this decision making process. It can often be easier to align youself with the interests of a larger media company and let them carry the water up the hill, rather than trying to do it independantly as a startup. If you’re Dogster, you’ll have less success pushing a new standard for “sponsored profiles” than MySpace/FIM or AIMpages/AOL. So making sure that your sponsored profiles packages contain the same elements as those of the big guys will make your life easier as they take this new ad unit through the standardization process
The alternative approach is to make sure that your new form of advertising so closely parallels an existing standard ad unit that it can be considered within the existing bucket. 30 second online video ads (same format as TV),online leads (similar to phone leads) and new variations of CPC advertising (similar to search) have all been “close enough” to an existing ad unit that they have been able to tap existing ad budgets and grow quickly.
In either case, when building business plans on the assumption of the adoption of new ad units, make sure you give yourself enough time in your plans for the market to be created before it can grow to scale.
Lead gen is dead. Long live lead gen January 8, 2007
Posted by jeremyliew in Consumer internet, Ecommerce, Lead gen, Search, startups.13 comments
There has been some vigorous comment discussion on the post of 2007 consumer internet predictions, mostly about the lead gen prediction. Firstly, its wonderful to get comments – thank you. When you first start blogging it feels like shouting out a window into the darkness; you’re not really sure if anyone is out there, listening. It’s good to know that I’m not just talking to myself!
On to lead gen. There were two broad schools of thought on the state of lead gen. One is epitomized by a Jason Calacanis’ comment which, while lacking in detail, none the less crisply conveys his opinion of the industry and those who work in it.
Lead generation is dead. Companies would really be foolish to start a new leadgen company – especially NOW. Geesh.
Others shared more detail, and see a troubling situation as the arbitrage opportunities between buying CPC advertising and selling leads dry up. The markets, both in paid search and in remnant banner advertising, have become more efficient, squeezing margins for lead gen companies.
Yet others are more optimistic. Langley Steinert (co-founder of TripAdvisor, now CEO of Cargurus.com, and one of the pioneers of lead generation) believes that advertisers would much prefer to pay for leads, and others agree, although sometimes with reservations about if this is in the long term interest of the lead buyers
How can we reconcile some of these positions?
Simplifying substantially, lead gen comprises three processes:
1. Acquiring traffic (e.g. from paid search, organic search, brand advertising, banner advertising, distribution deals etc).
2. Converting traffic to leads through a form-fill process
3. Finding the highest value for a lead among multiple buyers (ie having a network of advertisers and knowing who placed what value on each lead)
Historically, most lead gen companies have been vertically integrated, doing all three processes. Also, historically, lead gen has been focused on a small number of industries, including mortgage lending (including refi, and home equity), consumer credit (including credit cards, educational lending, auto loans), new auto sales and online education.
In these industries, I think it’s fair to say that margins are shrinking and that competition is growing fiercer. The market, while not perfect, is becoming a lot more efficient. Some companies have established a competitive advantage in process #1 by locking in traffic either from organic search, from long term distribution deals, or by having established branded destinations (e.g. Lending Tree). Others have established a competitive advantage in process #3 through the breadth of their buyer network (e.g. Autobytel). Entering these markets today is going to be a tough road to hoe.
As I said in my prior post, I think we’ll see similar principles applied in other categories that also have high customer value, can sustain a sales person’s costs, are infrequent purchases by consumers and have complexity in the decision making process. Possibilities include wedding photography, plastic surgery, LASIK, cosmetic dentistry, eldercare, even business purchases. These categories still allow arbitrage opportunities between CPC advertising and lead gen as they are still inefficient. However, they will also become efficient over time, and long term winners will need to establish competitive advantage in processes #1 and #2 as outlined above.
Interestingly enough, some companies, notably Leadpoint and Root Exchange, are trying to commoditize process #3 by establishing a “marketplace” for buyers and sellers of leads to efficiently find each other (taking a cut of the transaction in the process). If they are successful in doing this in the newer lead gen markets, they will serve to accelerate the margin compression and force successful lead gen companies to focus on the three elements of traffic acquisition that can sustain arbitrage: organic search traffic, branded destination traffic and long term distribution relationships.
It will be interesting to see how this industry plays out. Comments and thoughts, especially from industry practitioners, most welcome.
UPDATE: Some very interesting comments posted – worth reading if you are only getting a feed
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