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Think Big. Move Fast.

As my previous post indicated, it is not easy to build an online media company to $50m in revenue. Depending on whether you’re broad reach, demographically focused, or can support endemic advertisers, you need to get to top 10, top 25 or top 125 levels of US website traffic.

A couple of interesting studies have come out recently that underscore how difficult this can be.

At the Online Publishers Association’s Forum on the Future earlier this month, Marketspace (a consulting firm associated with Monitor) announced the results of their research which showed that 92% of 2006 gross online ad spend in the US went to only four companies; Google, Yahoo, MSN and AOL. Although some portion of that ad spend was subsequently distributed to independent sites through ad networks (e.g. AOL’s Advertising.com, Google’s Adsense, Yahoo’s Publisher Network etc), that is a big proportion of the total. Furthermore, that is an INCREASE from the 88% that went to those four companies in 2005.

Now According to the IAB and PwC, internet advertising revenues for 2006 were estimated to be $16.8 billion, a 34 percent increase over $12.5 billion in 2005. So doing the math, that suggests that the online advertising that didn’t go to the big four actually DECREASED from $1.5bn in 2005 to $1.34bn in 2006.

For companies in the broad reach/$1 RPM bucket, this probably doesn’t matter much. Ad networks owned by the big four sell a lot of their advertising anyway. But for companies that target endemic advertisers, this is sobering information. To be able to realize RPMs in the $20 range, companies will need to have their own sales force. And if these numbers are to be believed, this sales force is actually competing for a share of a slightly shrinking pie.

These numbers don’t quite match to the numbers in Avenue A/Razorfish’s 2007 Digital Outlook report, which is well summarized at Paidcontent, but they agree directionally. Avenue A says that portals have increased their share of online ad spend by 85% from 2005 to 2006, from 13% of overall ad spend to 24%. (This report breaks out search and ad networks separately – the big four would be a combination of these categories).

It would appear that advertisers are seeking consolidation in their spending patterns.

This isn’t entirely a doom and gloom story – online advertising revenue as a class is still growing at 34%, and $1.34bn of online ad spend among the independents is still plenty of revenue to go around. But it does underscore the need for websites to have a compelling story for advertisers, both about user targeting and about volume of traffic.

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  • http://www.mychurch.org/joesuh/blog joe

    Its somewhat ironic… long tail of advertisers is serving the largest publishers. Meanwhile, the long tail of demographic and vertical publishers need a business development staff in house to pursue a shrinking pie of premium advertisers.

  • http://www.live.com Eytan

    Hi Jeremey,
    Great post! This definitely is an interesting break down of where ad dollars are being spent.

    I think, however, that what makes this so incredibly misleading is something which you call out and that is “…Although some portion of that ad spend was subsequently distributed to independent sites through ad networks (e.g. AOL’s Advertising.com, Google’s Adsense, Yahoo’s Publisher Network etc)…”

    This is not a small deal. So many sites use these Ad Networks and many of them are non-trivial. A simple example if Engadget. That is a huge site which uses AdSense. I dont think this is an isolated example. It is easy to say that the ad dollars are being spent with Google, however that feels too simplistic because the reality of it is that much of that money is getting plowed to sites such as engadget.

    eytan

  • http://lsvp.wordpress.com jeremyliew

    Eytan,

    I agree, the money flowing to smaller sites is not a small deal. According to Google’s latest quarterly filing, their TAC is about 30% of their total revenue, $825m in Q4 2006 alone. (TAC is the amount they pay their network of partners). This includes both search and adsense revenue share, with search being the lion’s share of the TAC payments. But taking this into account, I think you come to similar conclusions directionally (although the numbers change).

    Note too that TAC % is lower for AOL, MS and Y! than it is for Google as Google has the biggest network of partners.

  • http://www.live.com Eytan

    Hi Jeremy,
    First off, I apologize for misspelling your name! Second, thanks for the reply!

    I pulled the TAC numbers from Google: http://investor.google.com/earnings.html and found that Google had TAC of 723M, 785M, 825M and 976M in Q1 through Q4 respectively. This totals 3,309M.

    It is harder to find the numbers on Yahoo! In one particular quarter in 2005 it looks like they paid out about 353M in TAC: http://docs.yahoo.com/docs/pr/pdf/1q05pr.pdf

    MS and AOL don’t break out TAC numbers.

    So, let’s say that Yahoo!, MS and AOL combined had a total TAC of 1,700M in 2006. This does not seem absurd given that Yahoo! had about 353M of it one quarter, in 2005.

    That is a total of 5,000M (5B) or 30% of the 16.8B spent on advertising in 2006. Combined with the other 8% and the equation is now that 62% goes to Google, Yahoo, AOL and Microsoft and that the other 38% goes to *many* other businesses. I agree that the big 4 are still taking in the majority of dollars, however, it is not nearly as dramatic as 92%.

    At the core, however, your observation is an interesting one.

    eytan

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  • http://www.carloversdream Jay Patterson

    a lot of great info on this post.

    Jay Patterson
    Overland Park, Kansas

  • ben

    For anyone interested in financial analysis on monetizing web traffic I’d suggest having a look at Morgan Stanley’s site as well where their research folks post some interesting presentations on the topic:

    http://www.morganstanley.com/views/perspectives/files/Global_Internet_Trends_121906_FINAL.pdf

    http://www.morganstanley.com/institutional/techresearch/pdfs/msinternetadreport101306.pdf

    They estimate that Y! + Google take 58% of US online ad spend, So while I don’t think the number gets to 92% for the top four it looks like it could realistically be better than 62%. I think AOL’s revenue from their SEC filings was $1.8B, so give them another 10% and maybe 5-10% for MS. The key driver IMO is search and the ad networks. Search is 44% of total market spend, and that’s all but locked up by top players, and the handful of leading ad networks probably make up another 5-10% (ad.com alone had $455 M which would be 2.5%) which is directly competing for premium display money even before you take into account the YouTubes of the world.

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  • http://www.skypeprof.com Lee Taylor

    Is there any chance of a 2011 forecast on this topic?
    I’m particularly interested in seeing if the revenue generated per subscriber has changed post crises