Online Ad Bubbles And The Future Of The Search Economy

I've received a lot of e-mail from my Oct. 7th MediaPost column, "Is The Online Ad Industry Partying Like It's 1999?"   Numerous correspondents asked me for advice about how to weather a shake-out, and I've obliged by offering some common-sense advice, which I'll include at the end of this article.

Of course, not everybody agrees with my assertion that the high-flying, online ad industry is headed for dangerous turbulence in the near future. MediaPost contributor Aaron Goldman recently weighed in with an article claiming that an increased commitment to users will shield the industry from the worst effects of any downturn. Aaron cites Google's success as a shining example of this commitment, and I agree with him that the online ad business has come a long way from the bad old days of stupid, intrusive ad methods. Others have claimed that major changes in the physical infrastructure of the online industry (i.e. high broadband penetration), erosion of traditional media market power, and new promising forms of monetizable content and interactivity, will make a repeat of the 2000-01 meltdown unlikely.

I sincerely hope these optimists are right, but I remain convinced that the bubble is real and that a correction is in order for reasons that are quite different than those cited by Aaron. Let me explain more fully why the current situation is, in my view, clearly unsustainable.

Bubble Forensics Begin With Following The Money
While the outer form of the online ad industry has changed much since the late 1990's, its inner logic, especially in respect to the way that money flows through it, bears an uncanny similarity to that which characterized the pre-bubble era of 1997-2000.

Let's examine the actual flow of money that underlay the Web 1.0 boom/bust. Entrepreneurs raised millions from venture capitalists looking for "the next Netscape." Where did this money go? Largely into marketing expenses, which included print and online ads (plus insane marketing stunts such as sponsoring the Golden Gate Bridge, enigmatic SuperBowl ads and thousands of elaborate parties).

High print spending propelled tech industry magazines such as Red Herring, Fast Company, and Business 2.0 to record-breaking ad page counts. High online marketing expenditures made Web 1.0 ad firms such as DoubleClick into instant powerhouses. Firms such as DoubleClick, because they were at the very end of the money trail and were so dependent on the VC/entrepreneur/marketing cycle, fell the hardest (DoubleClick's stock went from $135 to $12 within a few months of the dotcom crash). Online ad spending crashed at the same time, creating enough collateral damage to wipe out an entire generation of online publishers.

Parallels Between Google (Circa 2007) And DoubleClick (Circa 1999)
Any analyst or investor examining DoubleClick's future prospects in the late 1990's would have had no clue of what was in store by looking just at the company. Only by examining the money flow would it have become clear that DoubleClick and its brethren were so severely exposed to a generalized downturn.

That same principle (study the money flow, not the company) is applicable today. Companies, both those funded speculatively and increasingly, more established "real" companies that have been in business for years, allocate marketing budgets of which an increasing share is directed to online channels, particularly search. Where does that money go? Well, much of it goes to Google, whose market valuation (currently well above $630 per share) is dependent on this money increasing in the future. Google, like DoubleClick in 1999, is at the end of the money trail and equally exposed.

Unfortunately, the analysts following Google never look beyond the company to the key question of how healthy their clients (advertisers) are. How many are spending $1 million a month and making a mere $1.1 million back, at an ROI of 1.1? How many are operating in negative ROI territory because they realize that any withdrawal from Google will cede market share to competitors -- in effect paying Google a tax to prevent further erosion of their competitive position? Any analyst worth his/her salt should be looking at these issues.

As an SEM agency, we encounter horror stories of unprofitable search campaigns every day in the field. Many of our own clients come to us because they are desperately trying to improve once-robust but ever-decreasing margins on their search campaigns. But Google doesn't have the conversion data required to know how well or poorly its clients are doing (nor would it likely divulge such information, even if it did know). The result is that if you look at Google alone, you'll see nothing but solid profitability. It is only by examining the often-precarious financial position of its many clients that one can detect that this situation is ultimately unsustainable.

Tips on Weathering a Shakeout
One important lesson from 2000-01 is that even a generalized crash won't kill the Internet economy. Bubbles are never 100 percent "air," and there will be many companies with good fundamentals that will weather the storm. But here are some tips for online/search practitioners to consider. My hope is that they will stand you in good stead whatever the future may bring:

a. Don't get too comfortable doing what you're doing now. Change is the only constant. Don't just focus on SEM - focus on marketing, which will never go away, even if the whole search industry (God forbid) collapses.

b. Don't live beyond your means or become hypnotized by stock options or equity that can't be cashed. Lots of people got caught in this trap during the first online boom/bust cycle; don't become one of them this time around.

c. The time to network and promote yourself is now, not after a crash, when everybody's scrambling to keep their heads above water. Seek out a company with strong fundamentals whose future isn't based on speculative hopes.

d. The best SEM professionals are really business consultants. Educate yourself about the fundamentals of business and what techniques drive real growth (again, think marketing, not SEM)



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