In Defense of (Web) Advertising

OK, we get it. The ad industry is going to suffer in 2009. Someone recently pointed me in the direction of this NY Times blog post on the bleak outlook for ad-supported start-ups. While it raises plenty of good points about Twitter's and Facebook's issues with cash, valuation, and monetization in a depressed ad market, it also tends to exaggerate a few points. Also, it brings up points--such as VCs skepticism of ad-supported websites--that aren't necessarily new. Here was my e-mail response to this blog post:

Thanks for the interesting article. It brings up a lot of interesting issues with Facebook and Twitter, both of which have some serious issues with cash, valuation, and monetization.

I think it exaggerates a few points, though. I'm sure ad-supported websites get rejected by VCs all the time, regardless of the ad market. The problem is that there are so many websites out there that adopt the ad model because of a lack of a better idea. The model gets a bad rap as a "default" business model for the ambitious hobbyist. Plus, it just so happens that the majority of Web 2.0 websites lack the content and the context to monetize well with ads.

The point about having diversified revenue streams is well taken. However, any comparison between now and the dot com bubble should be met with skepticism. The online ad market itself does not resemble a bubble at all--and certainly did not lead us to the mess we're in. (With that said, there might be a VC-backed Web 2.0 bubble--but this is still not the same thing as the ad market itself.) When people are pinching pennies as they are now, there's no reason to believe that current online ad spending is anything short of reasonable based on the most conservative ROI calculations. So, even though ad spending will come down a bit, even in the online space, I don't expect anything much more drastic in 2009 than what we're going to see in Q4 (crossing fingers). Furthermore, the fundamentals for the online ad market are still strong, as online continues to gain market share against traditional media channels. If you are only expecting monetization 3-5 years out, why should you dwell on short-term fluctuations in effective CPM rates? In fact, a shrewd VC might relish the opportunity to make equity investments at attractive valuations.

Of course, VCs will make up their own minds :)