Are We Sure About Pending Collapse of Ad-Supported Internet?
by
on October 06, 2008,
The current economic crisis is already compared quite often to the Great Depression of 1930s. And while similarities are already here and probably we will have more of them to witness if the situation continues to worsen, there is one thing that bothers many of us here in the technology blogosphere - the future of internet. It is a well-known fact that the vast majority of internet businesses (startups and blogs alike) rely heavily on advertising for their income.
The first thing people usually express concerns about is how online advertising market will be affected during this difficult period with companies looking for way to cut expenses everywhere they can - with advertising supposed to be first item to cut. And we quickly jump to a conclusion that there will be no money to be made online (or much less money to support everyone working here now) - thus we will face a collapse or at the very least stagnation of internet industry.
But for some reason this seems to be an over-simplified approach to me so since we have already started to compare the current financial turmoil to the Great Depression, I decided to see how advertising was doing at that difficult time and see if it was really that bad. To my surprise the results were contrary to what I expected to see with advertising actually looking like a relatively healthy industry for the generally bad financial environment at the time.
The first thing to keep in mind is that people will not stop buying products that are essential to them. True, people will hardly buy luxury products when they need to make decisions on what is really important and what they could live without given limited resources. But that does not mean people will not buy anything at all - it simply means the focus will change for them. So the first conclusion is that we will obviously see less luxury brands advertised. But it does not mean that manufacturers of those essential products will stop advertising as well. What’s more, they will have to compete with each other for those scarce money people will have in their disposal.
What’s more, in a bad environment consumers will be actively looking for better deals to spend those scarce money wisely. And if a company can offer a better deal to a consumer, it should advertise this opportunity because if no one knows you have something better to offer when compared to your competitor, how will you manage to make consumers make a choice in favor of your product.
There was quite a number of examples of successful brands during the Great Depression, including Chevrolet cars, Camel cigarettes and Procter & Gamble (that gave birth to the phenomenon of soap opera during those hard times). And all of them relied heavily on advertising because they realized that they needed advertising to create and maintain brand loyalty. They simply pretended there was nothing particularly wrong with the economy and consumers still had money to spend - and this proved to be the right approach for them.
We should also keep in mind that advertising is one of the measures to demonstrate to consumers that the company is healthy. After all, not all the consumers have a daily habit of tracking stock market behavior to know what’s going on - yet when they see a company spending money on advertising, they think everything is fine with the company. Say, if every time you see a T-Mobile or Blackberry ad on every single blog you visit and one day you see those ads replaced with AT&T and iPhone respectively, your first reaction is supposed to be thinking that the first two are already facing some serious problems while the competitors are in a better position.
And this explains why those companies that survived the Great Depression and even grew during the recession period were not those that were wise about their budgets and cut on advertising as much as they could - instead those were the companies that continued to push their brands to consumers, thus making those consumers choose their brands over competitors (under-advertised) when making a decision what to spend their limited money on.
Any recession is a period when everyone needs to make a decision of choosing between available options to make wiser decisions. Similarly as consumers choose what they will buy looking for better deals, companies will also want to make sure that all the investments are reasonable. So those types of advertising that happen to have good return on investment will most certainly stay appealing to advertisers. At the same time advertisers will probably avoid paying for eyeballs where they can not evaluate how many people that view the ad actually make a purchase. Companies will still want to stand out of the crowd but they will not want to through money away for the sake of it because standing out of the crowd will mean making more sales thanks to brand loyalty.
I can not be 100% sure but I think it is very much possible that forward-thinking companies will probably avoid cutting their advertising budgets. Instead, they will need to decide where advertising performs the best. I have a feeling that internet has pretty strong chances of becoming that platform advertisers will turn to as an alternative to their current old media platforms looking for easier measurable conversion rates.
Of course certain rearrangement of how online advertising market is functioning now is absolutely possible with advertisers turning to various CPC and CPA solutions where they know for sure what they pay for instead of paying for some abstract brand exposure. But that does not mean that online advertising will be severely damaged by the recession. Of course I may be too optimistic in this position but for now I would not be 100% sure predicting a doomsday of the internet economy.
Photo of the outdoor advertising during Great Depression courtesy of the University of Texas in Austin. Photo of the $.99 bargain by PetroleumJelliffe used under Creative Commons.
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Svetlana Gladkova
Opensource 
Michael Fidler 
I agree, companies have to advertise, an economic slow down should make people evaluate how they spend their advertising $$ and is likely to push more money from offline to online advertising, where everything is more trackable and accountable.
We saw this in the 2000 with the first European PPC network (Espotting Media), which got more and more advertising cash as we provided greater accountability of how the money was spent.
The John Wanamaker saying: “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” is no longer true when it comes to online advertising (with the right tools of course) and in a downturn people would evaluate their spend very carefully.
Interesting and timely post. The reality is that evening during a recession, companies can continue to innovate and take share, and even grow.
The current crisis can even be an opportunity, as I blogged about just today:
http://sparkplug9.com/2008/10/06/economic-crisis-software20-opportunity/
CPM is rising for me, looks very promising. Summer is over, we got a financial disaster and election, all the info is online, this is good for us.
@Ivalio: True, this is one of the most popular opinions - companies will need to decide how to spend their advertising dollars and internet will likely be the most appealing platform because of the accountability the right ad networks can provide. Of course there are certain brands and products that will hardly reach the right audience online but in general this rings true. And this is one of the reasons why I think we should not be over-pessimistic in this situation about the future of ad-supported websites and services.
Great and timely article.
While we are busy comparing the current crisis to the “Great Depression,” there are a couple of things that are different in this scenario. The tight inter-connectedness between the various financial institutions around the world is a case in point.
Online advertising will see a spike for the various reasons you mentioned along with the fact that the rise in gas price means online shopping will see a huge spike in traffic and what that translates into will be more ads served etc. etc. I am guessing that Amazon will be laughing its way to the bank this holiday season in spite of the tight economic market.
Kamla
@ PJ Brunet: Very ironic - we have a financial disaster that brings more people online and many related websites increase their revenues instead of losing
I actually have not noticed any substantial CPM increase here but I have not see it falling either so hopefully the optimists like me will prove to be right eventually.
@ John Koetsier: 100% true, even at the Great Depression there were whole industries that grew incredibly, like radio, for example. Hopefully this will be the case in this situation as well and I’ll be sure to read your thoughts about this as well.
@ Kamla Bhatt: True, gas prices are often quoted as a reason for substantial growth of online shopping and chances are it will play a good role again for Amazon and other online retailers this holiday season as well. And along with the e-shops, their affiliates displaying CPA ads will also be in a good position as people will be likely to buy a product recommended by a blogger instead of going shopping to a far-away mall to compare products and prices. Yes another reason to be optimistic, thank you for bringing this to our attention.
Nice thoughtful post with good effort, Svetlana.
The important thing is to recognize which marketers have successfully converted wants into needs and also not sure how much brand advertising startups can afford….
We definitely see cheaper computer support to always be a need
Mrinal: Quite logical for you and I don’t think my ideas here are always true for the majority of startups that can rarely afford advertising at all - let alone large-scale advertising that can hardly be measurable. Startups often rely on other means of delivering their messages to potential users and business model seems to be of higher importance to startups - and here is where I think CrossLoop is absolutely safe.
So the ad-supported Internet will not collapse, but do you think it will be harder for ad-supported start-ups to survive?
@Ivalio: Actually yes, here I was mainly taking about advertisers and the fact that they will continue to pay for advertising online but that does not mean they won’t change their opinions on where they put those ads. And if media websites provide targeting (at least to a certain extent), startups that rely on advertising rarely do and they push crappy ads that are supposed to fit any audience to their users. I’m afraid this is not what advertisers want for their ads so many startups will have to either think up ways to prove to potential sponsors that they do have the audience they need or to charge their users for their services.
Interesting post Svetlana & its great that you can keep your mind whilst those everywhere are losing theirs! If everyone thinks ‘Great Depression’ then ‘as if magically?’ they will definitely create that experience for themselves as they will start to act as if there was a ‘Great Depression’. I am amazed at how many sane people have slowly become ‘insane’ over the last few months, particularly over the last month. I appreciate that a number of banks who had foundations in unstable situations through greed, have either collapsed or been propped up by other institutions. However that should be good because obviously these systems were not working & that has been abruptly exposed during 2008. Let’s move forward in business with a positive attitude & realize that if we build on solid & true foundations of supplying a need to a market that we will succeed no matter what other less scrupulous organizations have done. Technology & the Internet are now the main & central path for communication and I doubt if the advertising industry is going to pack up their bags & go home. No they are creative people sometimes by definition and they will continue to sell advertising. Of course they too will realize that the Internet is the best avenue reaching global markets & not interrupting people as TV & radio advertising did in the past. Where else can you access all forms of communication - text, pictures & video???
@Svetlana: This will be problematic especially for start-ups that say they will be ad-funded but mean we have no idea how it is going to work.
We have been looking into some strategic investments in eastern Europe and I can not tell you how many start-ups we have spoken to have advertising as their business model, but have no idea where the ads would go, why would advertisers want to buy ads, who their potential advertisers are etc etc… In a climate where they could build up their audience and be acquired that could have worked, but now there is going to be a lot of struggle.
Pemo Theodore: Very reasonable position, thank you for such a comment. I myself also think that part of the current problems is in panic that seems to be everywhere - hurting traders in particular. If we all just gather our senses and try to think logically (including learning from the past as it might provide a useful lesson or two as well), things might just start to slightly improve.
And you are absolutely right on the potential of internet as an advertising platform that will most certainly be gaining strength in this difficult financial situation since it is better measurable and offers a variety of ways to reach potential consumers that no other medium can even attempt to reach.
Probably the best post i’ve read on here Svetlana! Both interesting, relevant and concise - what’s more I completely agree with you! Considering how many startups out there are (at the moment) purely ad-supported it really is a very scary time for the web 2.0 startup.
Some good thoughts here. For clarification, in 2000 the shift from traditional to online ad was a meaningful gain while the overall market shrank. This time will see a continued trend and wise advertisers will push even harder as CPC and CPM’s go down.
What will go down dramatically is non-commerce ads, e.g. branding, across the spectrum (think about the health of the auto industry). After branding comes luxury goods degredation as advertising a good that won’t be bought doesn’t last long.
As a result, like all recessions, the ad: media+content businesses will suffer as they have over the decades. Innovative content providers will shift with the changing times and cater to the ad spenders that can survive during recessions like you’ve noted, but others will simply die from lack of support.
Interesting times.
Thanks for this post, very interesting and thought provoking. One thing that struck me is that it seems to me that much of the advertising on the web now is actually for luxury goods and services, or those that might not be deemed as necessary in harder times. There are a lot of digital products that might be more ingrained in people’s lives now though, such as some mobile and web goods and services. It’ll interesting to see what does happen, although people would prefer not to find out.
I am also wondering where you got your information from regarding advertising during the Great Depression, in terms of which companies advertised and which didn’t, or how much they spent on it in relation to others? I don’t see any references to sources here.
@Zee: Too many compliments for a single comment
Very pleased you enjoyed the post and even shared my opinion here!
@CoryS: Thank you for sharing your opinion here, I can certainly agree with your points on both transition of advertising to online from offline media and in restructuring of online advertising to include less brand ads and luxury brands pushed into users at the same time keeping investments reasonable. There is no doubt that advertising industry will see significant changes during this difficult period but that does not mean it will cease its existence.
@jjprojects: It will sure be interesting to witness how the situation develops but probably only time will tell. As for the sources, I used many articles about the Great Depression finding small bits of information in each of them so they were hard to link to. If you are interested, here you will find the most concise discussion on the topic itself with lots of examples not available here but it can not be viewed as a reliable source as it’s on Google Answers - just pretty good to get a general understanding of what was going on at the time http://answers.google.com/answers/threadview?id=178334.
upbeat and logical - nicely done svetlana
This is a very good & timely post. Thanks for sharing your thoughts.
There’s always products and services that are essentials. Food. Water. Firewood and other fuels. Toilet Paper. Plumbers and electricians. Tools to build shelter.
Luxury goods and services.. are not as useful so we might see a decline in the number of people interested in (clicking on and offering) these kinds of ads.
Always a good topic, and always debatable. However, the WSJ had a research piece that was gospel in the ad industry for a long time. think it was done during the 1982 recession and sort of proved that those companies who advertised strongly in downturns did better on the upswing than those competitiors who chose to sit it out. Haven’t looked at the study in ages though.
Package goods advertisers have not been the source of much internet advertising though. So, when looking at categories don’t count on them for much.
Also, search is the money maker. Display is chickenfeed. Search ain’t going away.
Clyde (or anyone) do you have a link to that the WSJ article?
@Workpost: Absolutely true but even toilet paper can become luxury if it is some premium brand, I believe. This is an exaggeration, of course, but the overall crisis does not mean we will have less ads for autos - yet we’ll see Roll Royce ads replaced with Fords maybe.
Clyde, too bad I have not bumped into the WSJ article you reference, I thought I have read everything even remotely related. If you do have a link to the article somewhere, I will really appreciate being able to take a look myself as well.
BTW, agree with you 100% on search, I honestly think Google will be one of the few ad networks that will be in the best position due to a combination of search as a platform for ads and CPC as a model advertisers certainly love better than CPM.
Too bad the google share price doesn’t support the theory
thanks a lot mike, I have enjoyed writing it and it looks like my best post so far - linked to from even NYT Freakonomics and tons of blogs. Kind of proves that when you enjoy what you talk about, it will have a chance of being a success.
Excellent article, Svetlana. The key part for advertisers will be to decide where to spend their money wisely — most of their spending is likely to move towards as much targeting across a cross-section of vehicles as possible. Online will be one portion, but you’ll likely see continued, and perhaps increased use of targeted print media as well.
@ivalio: You know what, I have a feeling that it is simply because of the panic everywhere. I watched real-time chat on Google finance about the shares price yesterday and it was just terrible. Someone said: you know, no one will pay for advertising during recession, Google will go broke, I’m selling - and many of those followed with the same decision. But as stated in the post, this assumption can simply be untrue and if shareholders bothered to think first and act second, the situation could be much better.
@Brian: Could be true but my belief is that the key word here is “targeted” for traditional media. Either they manage to prove that advertisers target just the right people, or they won’t make it at all.
I work in a co-lo facility hosting the major players in both internet services and ad tracking. By the amount of expansion they are doing you are dead nuts on.
Very interesting article! This is definitely true, now more than ever consumers want to know what’s better for their pocketbooks.
But then again,there are some sacrifices to be made:
We are a small design agency in San Francisco, and as advertisers/designers, justifying our fees is not easy, since were are providing a service, not a product. So even if these companies choose to advertise, we have to offer them competitive pricing. After all, just like their consumers, our clients are also looking for their best choice/price.
Check us out!
http://www.designabouttown.com/blog
@design: Well, it will be true for all the aspects: advertisers will be looking for cheaper and more efficient placements for their ads as well as cheaper prices for the creatives. I have not meant to say no one will be hurt, the goal was to prove that advertising is not going to go away because of the crisis, it will just have to be more reasonable (same as the entire industry).
Ok, great article. I think you are right that the online advertising community will grow, but I think it bears repeating about the fact that consumer will switch their spending. For the person who said Amazon is going to do huge business this Christmas season, I don’t know. They are relying more on luxury purchases or just plain purchases people can do without.
If the internet advertising industry makes the shift, it needs to quickly assess the needs of people and make sure those new needs are fulfilled. Just one thought, I remember reading an ad in some magazine in the early 1980’s recession. It was a get rich quick kind of ad and in it, the man with the luxury car wrote about how he started his marketing empire by selling a simple report on 101 uses for hamburger. It appealed to the tight economic times.
Nobody is reading the GD advertisements anyway!
Is there no one out there smart enough to figure out a revenue model that DOES NOT INCLUDE advertising?
Any ideas? Anyone?
@Sparky: Thank you, glad you’ve enjoyed the post. I am not sure myself Amazon will be big this holiday season though I do think that some portion of spending will move online to cut on gas but people will still buy what they actually need and can afford - online or offline - and this is what the advertising industry should understand pushing products consumers will actually buy. Good example with MLM ad, I am sure we will see it repeated if times get really bad again.
@Rob: In fact, there are smart people and you will most certainly see their products survive after the recession. It is just that it is difficult to come up both with a great idea for a startup and with a solid business model - thus we often have just one thing.
@Svetlana,
“@Rob: In fact, there are smart people and you will most certainly see their products survive after the recession. It is just that it is difficult to come up both with a great idea for a startup and with a solid business model - thus we often have just one thing.”
Then I wouldn’t call it a great idea.
Rob, the thing is that this is how people have already started to come up with ideas for startups - idea first, monetization only when we scale big enough. I guess it’s VC funding that has spoiled entrepreneurs but they now come up with ideas for websites or applications, not for businesses that could make money online.
Yes…I would agree with that.
And…because most professionals and entrepreneurs were raised and trained and cultured in an ‘ad-supported’ world, they do not know how business CAN work in a non-ad-supported, social media world.
Since the 1300s when the newspaper La Presse posted the first advertisement, ‘ad-support’ was the way the business world reached its customers. It was uni-directional, allowing no feedback from the market. Those days are done and we are lucky enough to live during a time when we get to watch those ivory towers fall.
Mass-media and business had woven themselves into a co-existent, co-dependent fabric. The unraveling of that fabric with the dismantling of mass-media rang the death-knell for ad-supported business. Good riddance. But, all of those who mortgaged their lives to that paradigm are now left holding nothing trying to figure out what to do in the social-media world.
There was a lot of money spent on educations that are no longer applicable.
Rob
http://web3solutions.blogspot.com
Hm, interesting ideas here Rob. True, both media and advertisers have grown too dependent on advertising and social media is changing significantly the way advertiser (or better a company nowadays) can reach its customers - both existing and potential. But since the company-customer relations can be direct these days, it must mean that there is no need for an intermediary like media outlets. So I can’t help but wonder if there’s any chance for the media world to figure out other revenue models as well - and unfortunately I don’t see any such models for now myself.
How about this revenue model…
As a business owner, I am no longer willing to pay for advertising; but, I would be willing to pay (and I bet a lot of other businesses would also) for a media company with its training and resources to research who my customers are, where they are, and engage them through social-media for me in some sort of affiliate arrangement. If the media company, or anyone, sends traffic to my site that results in a successful transaction, they get a fee.
It’s not as easy a ride for the media companies as the ad-world was, but it is a business-model for them.
Rob
http://web3solutions.blogspot.com
Rob, I actually think this is already the business model for many blogs as quite a number of A-listers engage in all types of social media consulting earning an additional (or often major) revenue in addition to what blog sponsors pay. It is already there and some of the media people manage to do quite well in it
So…to answer your question, “Are We Sure About Pending Collapse of Ad-Supported Internet?”
Yep!
Rob, you know that I can hardly agree with this statement and while many medium-sized blogs can only survive with an additional revenue source in form of consulting fees, others (huge ones) seem to do pretty well on advertising only. By the way, I myself am noticing CPM significantly improving on Profy in October compared to September so I have my small reasons to hope that ad-supported does not really mean dead - or at least not for now
Congrats! That’s awesome!
Take a look at this CNET article citing a Stanford University study from as far back as 2000 where reflexive eye monitoring showed the limited reach of online advertising to website visitors:
Vast majority of surfers ignore banner ads on Net
http://findarticles.com/p/articles/mi_qn4158/is_/ai_n14313283
So, it’s not this great conversation that’s drawing all your traffic?
Rob
http://web3solutions.blogspot.com
Rob, true, I know that even if people don’t block ads, they will still very rarely notice them at all - though such studies help advertisers and publishers understand how to position ads to ensure at least some visibility for them
And no, G1 phone seems to be the best attention grabber for us these days actually
Svetlana,
You’re getting overrun by spammers.
You might want to consider http://www.captcha.net/ .
Rob
Rob, the thing is that for some reason Akismet has been misbehaving lately - and while I remove spam comments everyone subscribed to comments on some posts still have them delivered. I still hope they’ll have something fixed soon as I really hate captchas myself and would not want readers to deal with them here
Comments to this post are closed as it seems to be an attractive target for spammers. If you want to add your comment to the discussion, feel free to email me at s.gladkova (at) profy.com and I will be sure to add it here. Thank you for your understanding1