Wall Street in 2007 = Web Street in 2009?

The online ad industry has been on a fairly stable course for at least seven years now. The last major disruption this industry suffered dated from the Great Dotcom Meltdown of 2001-02, when the entire economy collapsed. Since that time, things have largely been on the upswing, and it's remarkable to me that search spending -- the healthiest component of online -- has held together, even in the midst of a deep recession whose likes we have not seen since the 1930s.

However, the more I observe developments -- both inside and outside this industry -- the more I am convinced that we are all poised on the cusp of an era of great change that will shift the way we do business more seriously than anything we've experienced before. I am not a fortune-teller, and I can't possibly illustrate the precise form that our new world will take once these changes have occurred. Perhaps it's just intuition, or the fact that I've been watching and writing about the tech industry for 15 years now. But there's something in the air, and what I sense is the arrival of a perfect storm.



A perfect storm is, of course, when one has a number of discrete developments that mutually reinforce themselves to produce a catastrophic event. For example, in the recent global economic collapse, at least three of these were in play: exceptionally cheap money; the development of opaque hedging financial instruments so complex that even those selling them did not understand their operation; the feckless participation of rating agencies willing to stamp this junk as "investment grade"; a real estate bubble premised on the unshakable assumption that housing prices would forever increase; and a regulation-averse political environment. In retrospect, the collective folly that produced a catastrophic result is easy to pick apart; looked at prospectively, however, from the points of view of individual participants in this disaster, those who saw trouble ahead were marginalized as madmen, heretics, party-poopers, and anti-capitalists.

As I look at the world of online advertising today, I find eerie similarities to the very same factors that precipitated the financial collapse. I hope that I am not correct in predicting that we're all headed for a fall, but feel duty-bound to lay them out.

Cheap Money/Cheap Media. Cheap money (courtesy of Alan Greenspan and The Federal Reserve) fueled the real estate bubble. Today, thanks to a tremendous imbalance in supply/demand for media, Web media is ridiculously cheap, ads are literally everywhere, but nobody's paying attention to them. When it only costs $25 to buy hundreds of thousands of impressions on social networks, you've got a problem, because such cheap CPMs are poison for the publisher. If you don't believe me, believe Rupert Murdoch, who last week declared that he's had quite enough of the free/cheap content model, and is putting all his property behind a pay wall. If more A-list publishers emulate Murdoch's model, vast parts of the Web may soon "go dark," which will undercut and perhaps destroy the value of search engines.

Complex, Opaque Financial Instruments/Complex, Opaque Media Buying Processes. Investors and Investment banks purchasing CDOs (Collateralized Debt Obligations) and other complex instruments vehicles were shocked when it turned out that many of them were worthless, because the underlying subprime mortgages upon which they depended could never be paid back. Media buyers purchasing complex online media, including search media, are in a similar position. Search engines, with all their awesome technology and through no fault of their own, can't possibly reconcile all the nettlesome issues surrounding click fraud. The dynamic, competitor-dependent pricing of hybrid auctions make budgets impossible to set in advance. Achieving the promise of targeted media is expensive and labor-intensive, and the costs (in terms of HR and technology expense) often exceeds the cost of what the media is actually worth. No wonder people are now arguing that we should forget about counting clicks and move back to GRPs (gross rating points), an ancient relic of analog media!

Unreliable Rating Agencies/Irreconcilable Web Analytics. Wall Street's attempt to securitize what were essentially worthless debt obligations would never have happened without the participation of rating agencies, which stamped these bogus instruments with AAA ratings. In the media world, we've got plenty of companies purporting to be able to put a value on the media we buy, but none of them agree with each other, much less with data on our own server logs. For an industry that worships numbers and fetishizes accuracy, accountability, and innovation, it's crazy that we can't even agree on the basics.

Lazy/Ineffective Regulation. The belief that almost everyone in the online ad business seems to hold -- that we've got some kind of God-given right to do whatever we want with data we gather from users oblivious to our ability to track them -- is dangerously fallacious. How many companies are out there right now whose entire existence is predicated on the free-and-easy accumulation and mining of such data? All it would take is a decision by the Federal Trade Commission to make data collection contingent on users' opting-in to wipe this entire sector off the map. One thing's for sure: the FTC's new chief has made it clear that he's run out of patience with this industry's half-baked plans to regulate itself.

I really hope the online industry doesn't melt down the way Wall Street did, but I'm afraid that we may be in for some high winds and stomach-turning G-forces ahead.

5 comments about "Wall Street in 2007 = Web Street in 2009? ".
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  1. Clive Swanepoel from ZebraHost, August 10, 2009 at 12:01 p.m.

    Thanks for articulating so well the uncomfortable feeling that I have felt for some time that "Something's got to give..."

  2. Henry Blaufox from Dragon360, August 10, 2009 at 12:08 p.m.

    While I usually agree with Steve's insighful articles, this time I have a different take on the industry's future.

    While Steve is concerned that if more A-list publishers emulate Murdoch's pay for content model, vast parts of the Web may soon "go dark," the content won't be inaccessible. The software designs to make this work will probably include functions to display article links or very brief extracts - but then a requirement to make a small payment to view the whole article. It's like buying a single copy at a newsstand.

    As for "opaque processes," I've had a number of conversations with major media agency executives who are preparing to make streamlined, open processes a major issue to be resolved. I think the business software will follow. The same applies for understandable, easier to use Analytics, both data manipulation and presentation aspects.

    Finally, as for the abundance of ad supply- publishers and advertisers will learn, or relearn, the value of premium positions in premium (that is,. trusted and relaible) publications over content of questionable quality. Expect a lot of sites that are just plain bad to go away, and for people to rely on credible, high quality sources for information and entertainment. Advertising at higher rates will go there as well.

  3. Andrew Boer from MovableMedia, August 10, 2009 at 12:26 p.m.


    I think you are dead on. What is happening goes back to a fifteenth century economic observation called Gresham's law. Bad money will always chase out good money.

    Henry's view that Content in premium publications is still King is optimistic but ultimately misguided. The data barons now rule the roost.

  4. Paula Lynn from Who Else Unlimited, August 10, 2009 at 1:35 p.m.

    Another old economic observation - Less is more.

    Note: On that dot-com Humpty Dumpty fiasco - in many cases, the credit department of companies denied credit as in cash with order and the folk responsible to investors in the ivory towers as well as in CYA policy gave the go ahead and take the ads. (Oh, the details!) Sound like a familiar game?

  5. Gary Senser, August 10, 2009 at 2:17 p.m.

    Going back to the old way of doing things is not the answer. You can't put the genie back in the bottle. I think search is poised to be even stronger in the future. Search is an instance where people have their hand out looking for a specific product, service, information, etc. Just the opposite of advertising... in fact. Search is the reverse of broadcasting. If anything, I think its power in under estimated :)

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