The Internet is about to get a lot less profitable

I don’t care if you’re selling funky t-shirts, or have an online glamour magazine, the internet is about to get a lot less profitable. The US and world economies are going to the crapper and the internet is going to be taken along for the ride. People around the world will be buying less of everything. That means almost all products and services, and that means fewer ads, fewer clicks, and less revenue. 

In the advertising arena, brand advertising and “experimental advertising” will go first. It’s harder to measure their effectiveness so will suffer a more knee-jerk pull-back. But Pay-Per-Click (PPC) advertising will soon follow. The move of ad dollars from traditional media to the Internet will continue to help plug the hole in the dam, but if consumers are spending much less money, they will click on ads less often and each time they do they will be less likely to make a purchase. 

So what does this mean for web start ups? Get a new business model or prepare for your business to be a fraction of what you thought it would be.

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9 Comments »

  1. Seb G said

    Although I agree that most conventional means of advertising on the internet is going away, I don’t think the internet is getting less profitable. The internet hasn’t *been* profitable yet.

    Advertisers and producers alike do not understand how to make money on the internet yet, but it’s coming. The best example is how Youtube isn’t proportionally profitable versus the traffic it gets.

    Don’t worry, the internet is still very young.

  2. cynicalentrepreneur said

    You’re right that most websites are still looking for a business model. Although, it also seems the economic Armageddon tearing its way through the world will not make it any easier for the YouTubes to find it. YouTube must either figure out how to make money through advertising or otherwise charging for its services. But either way, if consumer discretionary spending is down, whatever its business model ends up being will now likely be a lot less lucrative.

  3. Seb G said

    The key is to avoid consumer discretionary spending altogether. The ideal system would only rely on a producer-advertiser relationship. Of course, this sounds “utopic” right now, but I firmly believe the internet will be able to cater to this kind of deal in the future. It’s like television, where there is ample free content and specialty channels are up for sale.

    Time will certainly tell!

  4. cynicalentrepreneur said

    I agree with your vision – I think over time products like Ad Exchanges will begin to move towards directly connecting publishers with producers, which will serve to make online advertising a whole lot more efficient. Although, because there is so much ad inventory online, I’m not sure if this will make running a website more profitable….

    On ad exchanges: http://www.clickz.com/showPage.html?page=3626556

  5. Seb G said

    There is much ad inventory, yes, good ones? Not so much. There is part of the blame that falls on advertisers to spend a little bit more on making ads that are targeted to the audience of the website it’s on. This is where the producer-advertiser relationship needs to expand. Where advertisers “sponsor” producers, but producers get to choose what’s being put on his website.

    Unfortunately, this takes a bit more effort and the advertiser is the one that should be doing more of it. Relying on automated ad networks to put up their ads on websites, be it banners or ad words, often alienates the audience more than entices them to click on the advertised product.

    This leads to less profit and less trust in the system which leads to less profit and even less trust in the system…

  6. cynicalentrepreneur said

    I agree with this point too – the trouble for an advertiser is how to scale their ads. So if I manage a $1 billion ad budget for Coke, I just don’t have time or resources to figure out the best ads to put on a site with say 200,000 monthly uniques. So instead, these big ad spenders might run a $100 million campaign with say MySpace and then just dump the rest in Google AdWords where they can measure the impact of the ads without much trouble. Perhaps in the longer run, publishers can take on some of the burden by proposing creative ad solutions to the big advertisers and the large advertisers can approve or modify them….

  7. Seb G said

    The metrics they get from ad banner or adword referrals looks nice on paper, but I hardly think they are accurate. Ad banners being the worst, adwords still have a long way to go before it’s the holy grail it’s built up to be. I don’t see why someone would invest in creating a position like SEO but not care about having a similar position for a more hands-on ad campaining, or ad placement.

    I think it has to do with ingrained old ways of doing business; it simply doesn’t cut it anymore on the internet. Just like big companies that sponsor evangelists to speak for them, they should have “webscouts” to advertise on the right blogs or sites when it’s the right time. Quality over Quantity, though won’t bring in huge numbers, chances are that those numbers are going to be real buyers.

  8. cynicalentrepreneur said

    You’re right. Big advertising firms and companies are not entirely rational in the way they allocate capital. It is still largely a relationship business. But this downturn may represent an opportunity for change, as belt tightening will hopefully dispense with many of the inefficiencies of the past.

  9. victorseo said

    Social networking is going to radically alter the idea of “advertising” on the internet. Search engines will decline dramatically as more and more people find everything they need inside their “trusted” networks. Business must fully integrate into social sites to become trusted neighbors. They won’t need to buy ads, but their spend will be about the same as they pay people to manage their presence in dozens, if not hundreds of social sites. Checkout my thoroughly opinionated views on this on my blog http://ims-seo.blogspot.com

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