

What Fred Wilson and the VCs don’t get about advertising - mikeleeorg
http://pandodaily.com/2012/12/12/what-fred-wilson-and-the-vcs-dont-get-about-advertising/

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rickmb
Okay, I'll risk being "that guy" who starts about adblock, but I seriously
tend to forget that there even is advertising on the web, let alone that it is
still a source of revenue for anyone else but Google.

I've always considered it one of those walking dead business-models, like
printed newspapers, and it regularly surprises me the practice is still alive
and well. I would be terrified to let my business depend on it.

~~~
jerhewet
> a source of revenue for anyone else but Google

My theory is that internet advertising is a zero-sum game (out of the left-
hand pocket into the right-hand pocket sort of thing), but there hasn't been
any serious, credible research to prove or disprove my intuitions.

And no, "serious" and "credible" do not apply to companies that sell internet
advertising and point to their own (air quotes) reasearch as proof that
internet advertising works.

AdBlock Plus and Ghostery for the win, by the way.

~~~
rgbrenner
let me get this straight.. you think companies are spending billions every
year on advertising without any proof, ROI figures, just solely from the seat
of their pants without any research, studies, etc? I assume because a company
like Walmart, for example, with a profit margin of 3%, is so flush with cash
they just throw around $600 million+ every year without any thought. Amazing.

I own an ecommerce store, 10 years. I can tell you that internet advertising
does more than pay for itself if you control the costs, track the sales that
result from it, etc (which is standard practice in internet advertising).

That's why when GM said they spent 10m+ on facebook with a very poor ROI, it
was big news. Advertisers will test new platforms like facebook, and when they
fail to perform, they will abandon them very quickly.

Google has lasted this long not because advertisers are stupid, but because
Google's Adwords has a positive ROI.

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jerhewet
Still waiting for those links to serious, credible research.

Yeah. I didn't think so.

~~~
rgbrenner
Look, I'm not going to go Google articles for you. You're perfectly capable of
doing that yourself. We're talking about an industry with 140+ billion
annually in revenue in the US alone (w/ about 35b spent on the internet). If
you think there isn't research on it, you're kidding yourself.

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PaulHoule
What the ad-supported business has going for (and against it) is that the
results are roughly linear with investment -- it's a plausible business plan
for an individual to make $1000 a month in ad revenue in their space time. The
business plan isn't too different if you've got a company with more staff that
takes $100,000 a month to support except it's harder to cherry-pick a niche
that's more profitable than average.

A company like AirBNB has to make a nonlinear change in people's behavior to
succeed, it has to cross some threshold, which produces a certain kind of risk
and poses a certain kind of reward. Advertising, in itself, doesn't need to be
disruptive to succeed.

For big brands you're facing the need for big investments to keep up your
brand. For instance, ESPN spends a lot on IP rights, photographers and other
things, and that is what makes ESPN a premium site. Again, you don't have this
tiny investment that explodes, but a slow and steady crawl that, in their
case, is surely subsidized by the huge multichannel TV business.

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tyena
Thanks - good post. That said, I don't think Fred Wilson was being
unreasonable.

I'm far from an expert but I'd agree that the ad business is a tough one in
which to succeed, maybe not when contrasted w/ mobile apps or gaming, but
certainly when compared to other web businesses with more distinct revenue
streams like enterprise solutions, etc.

Perhaps the founder of a successful advertising-based business such Bleacher
Report would disagree, but he has good reason to do so!

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freejack
The author ignores that there are a limited number of big ad budgets that will
spend big $$ on shitty placements like ESPN, etc.

I speak from experience. Anyone spending more than $1m a year on Internet
advertising is investing in "branding" more than they are investing in
"conversions". If you want to take the risk that this scales, go for it.

~~~
freejack
And perhaps I should add a "why" - the universe of web properties that can
convert is limited. They typically have a small audience, so the real spend
for any specific brand that will really convert into actual $$ sales is
limited. I'm guessing that its around the $1m mark. I could be wrong by an
order of magnitude, and probably not much more.

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programminggeek
Advertising based businesses are 100% about scale because making money with
ads is about math. Take a CPM of $10. To make $10,000,000 you need
1,000,000,000 page views. Figuring each user views 10 pages (which is probably
high), you are now down to something like 100,000,000 user sessions. Now,
figure each user visits your site 10 times a month (which would be a pretty
site), you're now down to needing 10,000,000 users a month to make $10 million
a month. That is a per user value of $1 per month or $12 a year.

Now, compare that to a SAAS that charged $25/month/user. You're now talking
per user revenue of $300 per year. It's a lot easier to build a company at
$300/user/year than $12/user/year.

To make $10 million a month at $25/user a month you need 400,000 users. That's
still a big number, but it's probably easier to reach 400,000 customers than
it is 10,000,000 users.

