A lifetime ago I worked on an Eastern European telecom group’s IPO and one of my favorite slides in my deck was borrowed from Goldman Sachs to paint the picture of a Multimedia Cycle. Yes, I said multimedia, but right now there is something shifting in the ad market that may or may not mean a recovery to yet another boom for the internet.
Picture this in a cycle:
Ads -> Content -> Applications -> Telecom Services -> Telecom Infrastructure -> Repeat
“Just as potential customer spending drives advertising expenditures, Ad
spending drives the development of content to create ad space.
Development of content drives spending telecommunications services to
delivery it. Development of telecommunications services requires
investment in applications and infrastructure.”
I also pointed out how GDP is correlated with ad spend and noted that ad spending drives internet recovery.
In 2004 there were signs the ad market recovered and the Web 2.0 boom was getting started. Google drove advertising innovation. To the point where way too many bloggers thought they could live off it. This ad recovery fueled a venture boom and falsely led many startups to leverage someone else’s business model instead of finding their own. Many of course didn’t make it through the crash, and those that did focused on creating their own leverage.
Ad revenue isn’t what it used to be. And it won’t be. Which may lead you to have concerns about the current recovery:
- The last boom didn’t deliver innovation in new ad formats and metrics, and there still isn’t a solid ad model for social networks like Facebook. Put simply, advertising still works for the old web. More on this later…
- Ad commoditization is moving far beyond text ads into other formats. The display ad market has moved to Real Time Ad Exchanges (disclosure: I’m an advisor to Triggit, which helps helps buyers optimize real time spend). Conversion rates always decline as the audience becomes sensitized, with the recent exception to newer formats like video ads (won’t last long.
- The B2B lead gen business has been cutthroat as well.
- CPMs, CPCs, CPEs & CPLs are falling through the floor. In part this may reflect the broader economy, but every last efficiency is being wrung out of the markets.
- What this means is what we’ve known. That traffic & engagement are less easy to monetize than during the last recovery. Or at the very least less than what was believed at the time.
This may lead you to believe the multimedia cycle will not be fueled, and internet recovery will stall the creation of the next wave of startups. But things have changed.
In Apple’s Garden of Eden, you can skip advertising and directly monetize your content and apps. Subscription and ad models are ready for the taking as well. But this forbidden fruit drives your app down to $.99 and you only get 2/3rds. You find yourself in the hit business, and usually it ends up being Hollywood’s studio model instead of an indie.
The big case in point is Twitter’s launch of Promoted Tweets, the launch of Bill Gross’ TweetUp and other new ad formats for the real time web like MyLike. It’s not just about Twitter finally finding a business model, built upon the problem they created for brands. They are testing a new ad format and ranking algorithm that hopes to strike a balance between advertiser and user. And the real test is if they gain distribution through their search and other ecosystem partners starting tomorrow @chirp.
I’m going to go out like a bird on a limb here to suggest that it may be another tipping point for Twitter. One that involves actual tips. And supports a good portion of the ecosystem. This will serve as a litmus test for ad formats on social networks.
But the key for Twitter is if they can gain a distribution advantage for how they monetize. The qualms of them buying partners shouldn’t concern partners, a lack of acquisitions should. “Filling holes” is a ridiculous analogy, btw. It reminds me about that story of a Dutch kid taking his finger to a dike. But not literally.
Others ad formats are arising, like with SlideShare’s AdShare for professional sharing (advisor disclosure).The question I have is if new ad formats and other ad innovation will fuel another modest boom, because ads will always be a portion of new rising internet business models that are widely adopted. What form will they take? And will social gain a creative form that is valued as much as the creativity we have despite it.