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Think Big. Move Fast.

As I have mentioned previously, we are entering an overall advertising recession and even online advertising growth has slowed. Notes the LA Times in August:

“Advertisers have pulled back in a pretty meaningful way, and display is feeling the brunt of it,” said Clay Moran, a Stanford Group analyst who recently wrote a research report called “Online Advertising: caution required.”

In recent weeks:

* Yahoo Inc. Chief Executive Jerry Yang told analysts that demand for display advertising was “softening.”

* Online publisher Tech Target Inc. lowered its third-quarter forecast, blaming “macroeconomic weakness in the U.S. and its impact on advertising spending.”

* Lending site Bankrate Inc. cut its 2008 guidance. CEO Thomas Evans explained that the company had “continued to experience softness in display advertising from several of our largest financial advertisers.”

* Ad network ValueClick Inc., based in Westlake Village, blamed the economy for a slowdown in display advertising, which led to a 6% drop in its second-quarter profit.

What does this mean for startups? When advertising budgets dry up, three things happen:


    1. Advertisers buy what they know

This has two implications. The first is simply brand recognition. It is much easier to make the case to buy media on a well known site. As a result, scale matters. The leaders in both web 1.0 (AOL, Yahoo, Cnet etc) and web 2.0 (Facebook, Myspace, Rockyou*, Digg etc) will continue to see high demand for their advertising inventory.

As the web 1.0 leaders are already at scale, they may see greater negative effects from the overall market, but there will continue to be a strong core of demand. Many of the web 2.0 companies have grown out their traffic and brand in advance of their sales forces, so they may be able to ride the growth of their sales teams to better mitigate the market effects.

But being big (5m+ UU/mth), and a leader in your category, will help a lot.

The second implication is that advertisers will continue to buy advertising against targeted content. Advertisers are used to buying content adjacencies. Targeting against users (whether behavioral or demographic targeting) can’t be counted on to lift CPMs in the next couple of years.

Sites with highly targeted content that attracts endemic advertisers (Flixster*, iLike, Streetfire.net* etc) or demographic clusters (TMZ, PopSugar, AskMen etc) will be better off than broad reach sites.


    2. Experimental budgets are the first to get cut.

In an ad recession, advertisers appetite for experimentation is low. They like to stick to the established ad standards. New forms of advertising are hard. Startups whose sales processes feel more like business development than selling off of a rate card may have a tougher time.

Companies selling standard ad units will weather the recession better than those that have unique ad units.

    3. Marketers keep funding direct response advertising.

The brightest spot in an ad recession is direct response. As Ad Age notes:

Many analysts now agree that when marketing budgets come under pressure in a stressed economy, those sectors that can best document their connection to ROI, such as search-engine advertising, are far more attractive to corporate chiefs than other kinds of less-trackable traditional advertising.

Direct marketers will continue to spend to acquire customers if that spend can be directly tracked to a sale. Lead gen companies (Quinn Street, Tippit*, LowerMyBills etc) will hold up better, as will companies with CPC and CPA models (Google, TripAdvisor, $uperRewards, etc). However, they may also be affected if the overall number of people “in market” goes down, or prospective buyers become less likely to buy, due to the overall economy slowing down.

Who will have it toughest? Sites that are sub scale (<1m UU month), with no targeted content AND selling custom ad units are going to have to work the hardest over the next few years. Great teams always find a way, but the road may be long and hard.

What are your thoughts as to what sort of online media companies will survive the ad recession best?

UPDATE: WSJ also finds that experimental budgets are getting cut

FURTHER UPDATE: Which companies might benefit from an online ad recession?

* Rockyou, Flixster, Streetfire.net and Tippit are Lightspeed Portfolio companies.

  • http://techaviv.com Aaron Cohen

    Jeremy:

    I would argue that display is going to get severely cut unless it has highly measuarable results… This means that any adnetwork from ad.com to Glam, to Slide, and RockYou to FB and Myspace will struggle with categories that don’t lend themselves well to really amazing creative executions (CPG and Pharma come to mind). If I’m an Internet media business I’m investing heavily in research that supports why it’s important to buy me and how ROI can be measured. I’m also using the recessionary environment to take bloated sales related costs (account mgmt, jr. sales people, steep commission bonuses) out of the structure. My advice is to get in front of this now, before it’s June 2009 and you have burned an incremental 1mm in cash that you would rather have in the bank.

    Aaron

  • http://okdork.com noah kagan

    jeremy,

    i think as we move forward the “branding” of advertising where it’s about awareness more than results will take a back seat to measurable success. with the amount of inventory online it’s clear cpms will go down and many sites will now survive providing a paying service. if they get paid then they will stay in service if not, then it’s deadpool time. With a slower economy more people want definitive ROI so cpa / cpc companies will still do well as people still want to grow or maintain there business.

  • http://www.dailypatricia.com Patricia

    great post!

  • http://blog.webpalnetworks.com/ Jason

    Poor performance based banners and display ads will be hurt badly, should find more creative conversion actions

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  • http://www.consumertrack.com Jeff

    I see the positives in this — we are a performance based internet marketing company, and regardless of a down or up economy, we buy media that is relevant to our products and services and partner with portals and publishers that understand we require a positive ROI on ALL our media spends.

    We have no use for display advertising that generates .01% Click thru rates, or run-of-site media buys that simply bother consumers, not engage them or provide a potential solution to their needs.

    Hopefully, this pull-back by larger advertisers who continue to buy media without much regard or knowledge of its ROI will force more publishers to build deeper relationships with their advertisers and understand what it takes to make a successful media buy.

    We are lucky to have a great deal of marketing partners who take the time, effort and testing to create strong media relationships that can benefit our company as well as their bottom line, and if we are lucky, be a great resource for the consumer at the same time…. What an idea!

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  • http://www.enversa.com marc pickren

    Some evidence supports that even during the great depression media budgets didn’t go down they just shifted (even though some companies obviously went out of business). As a student of Wunderman and a believer in the value of direct response mediums that include the Internet, I am now going to take it to the street and not hide my distrust of media that doesn’t have measurable results in the form of sales. Its going to be a street fight and everyone should come prepared to get a little bruised and bloody. The only people who will survive are those that take this very seriously and get in front of this as best they can.

  • http://www.endai.com Internet Marketing Company

    Looking at our clients 2009 marketing budgets, we are not convinced that “all” companies will reduce their marketing budgets. I do agree that branding and awareness campaigns will fall by the wayside this year. Many clients will be focused on direct response and if they are smart, they will study web analytics or work with an internet marketing company to truly understands consumer behavior and web analytics. The companies that get focused on driving traffic and analyzing that traffic will come out of this ahead of the game.