Bronte Media

One thing I have been pondering lately is the impact of a worsening economy on online advertising. The first conclusion is an easy one: A downturn will negatively impact online advertising. Any idiot who tells you otherwise is deluding themselves.

But like William Gibson said about the future, the hurt will not be evenly distributed. What I currently believe is that online media that captures a consumer closest to a decision (and by virtue helps the consumer make a decision) will fare better than ones that wont.

At the moment, current consensus seems to be that search will fare better and display will be hit hardest. But my problem with that is that it divides the Internet into two very broad categories: search and everything else (display).

What is a better framework for judging how different parts of display will fare? I have mostly seen by format (banner vs text vs video etc.) but again format is a very crude way of looking at things and does not correlate to gains and losses.

A better measure is some sort of behavioral index. With the consumer searching for ‘asbestos cancer lawyer’ on Google at index 100 to a group of High School girls chatting about life on Meebo at 0.

A little secret of portals is that a lot of inventory is actually communications in orientation. That is, email, IM and other types of social networking. During surges in online advertising earlier this decade, advertisers wanting to advertise on specific sections like Finance and Travel were forced to buy bundles of other inventory on the portal, which in most cases was mail.

While I believe that someone searching for mortgage in the morning will be valuable to reach during their email session in the afternoon, there is a great discount and we will see this being played out in the next few years. Also with surges of supply with inventory, marketers will be able to be more picky and be as close to that first search page view and in as close a context as that first mortgage page view.

Once this has been figured out, the tide will go out on Ad Networks and it will be revealed that a huge number of them have been swimming naked. However, there still will be a large black market of ad networks that know who to buy from for cheap and know who to sell to for more. But these are more sales agencies and wont attract venture capital.

The winners (as far as there can be winners in this market) will be directories and resource based content and the losers will be perishable content and communication services.

When I say resource based content, I mean content that is relevant for a period of greater than one week. Perishable content (like breaking news) is only relevant for less than one week.

Regarding ad-supported communications services, I believe that there will be a large reduction in current ones doing business, huge restructurings and new ones will be premised on very low expectations.

That is, Facebook and MySpace will endure a whole lot of hurt, and other social networks and web-based communications services will see their CPMs plummet even further. I expect MySpace and Facebook will become relatively large companies but the investment that each has received based upon the premise of steadily rising CPMs after figuring out behavioral targeting will fail.

We may see Facebook get attached to a portal so that in the next up turn advertisers who want to buy inventory on a finance section will be forced to pay $5cpms in buying large bundles of Facebook inventory just like they were with Yahoo Mail.

Other vertical social networks will become like online forums in the late nineties. There are a lot of great small businesses in each of them but none large enough to justify venture returns. Thus there will continue to exist wide and varied social networks but you will never hear of them again in mainstream press and jaded bloggers in 2011 will be writing of social networks as ‘failures’ only because some companies decided to take and some venture capitalists decided to give venture money.

I believe Ning will be like Jelsoft, makers of the vBulletin online forum software. It’s an 8 person company within the wider Internet Brands listed entity that sold 35,000 licenses for roughly $180 a pop in 2007. That is, a great little business that won’t be able to earn returns for the large amount of capital Ning has taken and the superstar management team they have there.

So basically if you have had the right expectations, nothing will change. But a lot of people will reset their expectations and that means a lot less capital being invested unfortunately.

And those ad-supported publishers nearer to helping a consumer make a decision on a product or service will fair better than those that entertain, are focused around short term news or help consumers communicate in new and more interesting way.