Monthly Archives: January 2006

Is the ad bubble leaking?

A month ago I suggested that “the wide profit margins Google enjoys on internet advertising are unsustainable.” The only question was: When exactly will those margins start to shrink?

In a post today, John Battelle reports on a recent announcement from FTD, the big florist, that provides at least a little evidence that the air may already be leaking out of the online ad bubble. As anyone who has spent any time on the web knows, florists are big-time advertisers. On December 29, FTD issued a press release announcing an order shortfall in its consumer segment over the holidays. The company’s CEO explained: “During the Christmas season, certain online search engine costs increased significantly over the prior year, and as such we made the decision not to pursue the resulting high cost order volume … Further, we have begun making additional investments in our marketing staff to help build a more diversified marketing portfolio.”

Search-based ads are, of course, sold through auctions. It’s only natural that an auction will tend to push the price of an ad up to the breakeven point – the point at which the cost of the ad equals the revenue the ad brings in. At that point (and certainly at any price beyond that point), the ad becomes economically unattractive. Rather than continue the bidding war, an advertiser – like, say, FTD – will choose “not to pursue the resulting high cost order volume” and will instead begin investing in alternative marketing programs that promise higher returns on every dollar spent. Per-click ad prices will then fall back to a more economically attractive level, and the company running the ad network – Google, say – will make a little less money per click.

Certainly, it would be wrong to read too much into a single, carefully worded statement from one company. But it seems FTD’s experience may not be an isolated one. A year ago, Meg Whitman, CEO of eBay, another huge online advertiser, said of rising search ad prices, “It’s incumbent upon us…to figure out how to moderate these quite significant increases in media costs,” according to Business Week. FTD’s actions thus point to a “possible conclusion,” as Battelle writes, that “search marketing may be on its way toward a slowdown, if not a plateau.” At the very least, the FTD release serves to highlight the danger in assuming that recent rates of growth in online ad earnings will be sustainable indefinitely. For any given ad, the per-click price will hit an economic ceiling, and advertisers will then stop bidding the price higher. The ability of advertisers to precisely measure the value of a click makes search ads attractive. But it also ensures that, in the end, the price will come to rest at a rational level.

Google branches out

Early last year, when Google launched Google Video, it announced that it would, at some point in the future, allow videos to be sold or rented through its service. According to the terms it posted, video owners would be able to set their own prices and Google would take a 30% commission on any revenue. According to various media reports, the Google video store will be formally launched tomorrow by Larry Page during his address at the Consumer Electronics Show in Las Vegas. According to the Financial Times, “The search company hopes to position the new video service as the internet’s first ‘open digital content marketplace,’ a place where owners of video content can make as much of their material available as they want.” Page will announce that the store will carry programs from CBS and ITN as well as music videos from Sony BMG and NBA games (in addition, one assumes, to amateur-produced video).

But how “open” will this “open digital content marketplace” really be? The FT says that “access to the store will be through an iTunes-like interface that will require users to download a new Google ‘player’ onto their PCs.” According to the Wall Street Journal, “Google has developed its own digital-rights-management software to protect downloaded videos from piracy.” If these reports pan out, then this sounds like yet another closed system and yet more headaches for consumers. So much for media convergence.

For Google, this will be a landmark move, as it will open a new revenue stream beyond advertising. It will also test the company’s ability to create an attractive user interface outside the web search world. And, of course, it will put the company directly in the sights of another aggressive competitor – Apple – as well as Microsoft and Yahoo. Expect a fierce fight.

Just try to pay attention

I made two New Year’s resolutions last week. The first was to stop blogging for a while to make time to do some other stuff. I broke that one yesterday. The second was to avoid getting into feedback loops with other bloggers. Today I’m going to break that one by quoting, in full, Steve Gillmor’s response to what I wrote yesterday:

Nick Carr’s latest post is a perfect example of a neutral gesture, one that sets up a transitional premise as the root of an alleged fundamental game-changer. As a gesture, it is still useful to those who view Nick’s conservative optimist-baiting as treading water. In this case, Nick moves up slightly in GestureRank by providing cues to the mid-market audience of fence-sitters in the Attention reboot. Nick’s facts are rigorous; his conclusions rudimentary. Net: The ball moves forward for those who have configured his gestures efficiently for their world view. For Nick, the book base builds. Not bad for slumming in the blogosphere. GestureRank: 7

Does Steve have someone translate his posts into French and then back into English before he publishes them?

The click economy

Last April, in one of my first posts on this blog, I wrote that “the eyeball strategy is back – with a vengeance.” I was responding to an announcement from Google that its revenues and profits had continued to skyrocket in last year’s first quarter. Now, the brokerage firm Piper Jaffray is predicting that Google’s stock will jump another 50 percent during 2006, surpassing $600 a share, and that it will be all blue skies for the company through the end of the decade. Writes analyst Safa Rashtchy: “In 2005, we estimate the paid search industry generated $10B globally, with Google capturing as much as 64% of that. In 2006, we expect the market to grow 41% with Google growing by more than 58% on a net revenue basis as the company capitalizes on its globally – strong brand and its high revenue-per-search. Over the next five years, we estimate the paid search industry will grow at a 37% CAGR to more than $33B in 2010, and we expect Google to capture the lion’s share of that revenue and grow faster than the market as a whole.”

Laissez les bons temps rouler! Still, though, I think I was wrong to use Google to illustrate the return of “eyeball monetization” as an attractive internet strategy. Google’s business isn’t really about monetizing eyeballs; it’s about monetizing clicks. That may seem like a small distinction – you have to attract the eyeball, after all, before you can spur the click – but I think there’s actually a very big difference. Eyeball monetization is the traditional media strategy: publish or broadcast content that attracts readers or viewers, and then intersperse ads among that content. The content, in this case, serves not to prompt action directly, but merely to draw an audience that’s attractive to companies looking to promote their products and services. There’s a natural distance, in other words, between the content and the ads – a distance that’s good for the content producer but often frustrating to the advertiser.

The click monetization strategy removes that distance. In Google’s AdSense program, for instance, a media company, or other content producer, earns nothing by simply attracting eyeballs. It only brings in cash by getting viewers to click on an ad link. The value of those clicks, moreover, varies enormously. Not all clicks are created equal. The economic incentive for the content producer therefore is not to produce content that simply engages a large or demographically attractive audience, but to produce content that (a) attracts an audience likely to click on a valuable advertising link and (b) increases the odds that such lucrative clicks will actually happen. Google talks a lot about the “relevance” of its ads, but relevance is a byproduct. Google is building an extraordinarily sophisticated machine for manipulating consumers – for increasing the odds that you or I will not just view or read but click. The most economically successful online content producers will be those that work within that system.

We’re still in the early stages of the growth of online media, and it’s not yet clear how the economics of click monetization will influence the production and distribution of content. Many content producers haven’t yet moved from the “eyeball” world to the “click” world. There are optimists who believe the web, and particularly the content-production technologies of Web 2.0, will erase the idea of “consumers” entirely; we’ll all become “producers,” and advertisers and marketers will serve us rather than manipulate us. But that looks increasingly like wishful thinking. Economics is destiny, and the economics of online media is all about manipulating consumers – in ways that couldn’t even have been dreamed of in the past.