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Think Big. Move Fast.

For the last two years I’ve been making predictions about the consumer internet, and this year is no exception.

First let’s take a look at how I did on last years predictions:

1. Social Media advertising, Online Video advertising and In-Game advertising start to become scalable.

Grade: B-. We’re seeing much greater scale on social media and online video advertising, with a standard emerging for online video, and movement towards a standard for social networks. In-game saw some progress but not as much.

2. Structured web emerges.

Grade: C. Notwithstanding the Powerset acquisition, the structured/semantic web hasn’t been a real theme for 2008.

3. Games 2.0

Grade: A. This year was a breakout year for social networking games, web based games and free to play games. I see this growth driving several of next years predictions as well, as you’ll see below.

Now on to new predictions. Note that the remainder of this article is cross posted at the Wall Street Journal.
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Last year, consumer Internet startups sprung up left and right, looking for U.S. traffic growth and relying on the robust growth of the advertising market to make money. We enter 2009 looking down the barrel of a recession. In this environment, I predict the following trends for consumer Internet companies:

1. Consumers seek cheap thrills

Even in a recession, people will still want to be entertained. The Great Depression saw resilience and even growth in movie ticket sales as one of the cheapest ways for people to entertain themselves. As this economy tightens through 2009, we’ll find growing numbers of “time rich-cash poor” consumers seeking today’s lowest cost methods to entertain themselves. In general, this will benefit two categories of consumer Internet companies.

First, social media and social networks. These are free and endlessly entertaining. As mainstream media companies cut costs, the relative value and quality of user generated content increases. MySpace, YouTube and Facebook all rank in the top 10 Web sites by aggregate time spent according to comScore. The most popular applications on Facebook and MySpace are all games, entertainment and lightweight communication, and these can provide endless hours of entertainment for users. It isn’t just Facebook and MySpace that will benefit though. Smaller social media sites that have built enough of a critical mass to have a self sustaining community will also see growing usage over the next year.

Second, games. Games are one of the most cost effective means of entertainment available. While a $10 movie ticket can provide 90 minutes of entertainment, a $60 computer game can easily provide 50-100 hours of entertainment. Free-to-play web based games make this math even more compelling, whether they be casual game portals like Pogo, virtual worlds like Gaia or massively multiplayer games like Runescape. The Web site with the highest amount of time spent per visitor in October was Pogo.com with 444 minutes/visitor. Number two was Yahoo, with just 291 minutes/visitor in the same period. Games in general, and free games in particular, can provide a lot of cheap thrills.

2. Trading real money for virtual goods

In Asia people have been paying real money for virtual goods for years. It is the primary business model for games and Internet companies in China and Korea, far more important that advertising. We’re starting to see similar behavior in the U.S., also led here by online games and social networks. On the back of the rise of social networks and games, 2009 will be the first real breakout year for this business model in the US.

To people who do not spend time on social networks, it seems crazy that people would pay real money to buy each other virtual gifts – pictures of things ranging from birthday cakes to hugging penguins – and then display them on their profile pages. But estimates peg Facebook’s digital gifts sales in the $35 million – 50 million range this year. As more human interaction moves online, these social tokens of appreciation move online in parallel.

In the same way, gamers are more than willing to buy virtual goods In 2007, Nexon made $30 million selling virtual goods to U.S. players of their games. These items either allow players extra powers in the game (e.g a bigger gun), or allow players to customize the way that their character looks (e.g. cool sunglasses). People want to win, and they want to look good doing it. Dozens of other games companies are now employing this model in the U.S.

Why would this recession be a time for virtual goods to take off in the U.S.? It actually has nothing to do with the economy, Rather, two new payment mechanisms are becoming available now that allow gamers, many young and without credit cards, to play these games to their full capacity. The first is that prepaid game cards are now being sold at retail, with Target leading the charge. The second is incentive marketing. If a player take an action (like signing up for a ring tone service, or completing a survey) the advertiser who benefits will fund the purchase of that players desired virtual goods. One virtual world company, Gaia, used to have three full time employees who did nothing but open envelopes of cash that their teen and ‘tween players sent them to buy virtual goods. Since rolling out their new payment mechanisms, their revenues have doubled and they no longer have to open envelopes full of pocket money.

Asia and Europe have led the US in the adoption of free to play games because they have had good alternative payment mechanisms in place for longer, including mobile payments and credits available for sale at internet cafes. Now the U.S. is ready to catch up.

3. Web 2.0 leaders pull further away from the pack

In a recession, when advertising budgets are cut, there is a flight to quality among advertisers. Size and “brand name” are good proxies for quality. Advertisers will want to buy advertising on big, well known websites. The big online media companies like Yahoo and AOL will benefit from this. However, they are already so big that they cannot escape the overall shrinkage of ad budgets.

On the other hand, many Web 2.0 companies, like Facebook and Digg, have build large user bases but have not yet built out their capacity to monetize their traffic. These companies will see the benefit of the advertiser flight to quality. However, as they are only now building out their sales forces, they will likely continue to see strong revenue growth in 2009.

4. Online ad prices continue to fall, alternatives help make up some of the ground

The Internet advertising market, like all markets, responds to changes in supply and demand. In the current recession, demand for advertising is likely to decrease. At the same time, supply of online inventory, page views, is continuing to increase. Social networks and other social media sites in particular are creating masses of new inventory. As a result, the price of online advertising will continue to fall in 2009.

Targeting may mitigate some of this fall. Better targeting is steadily improving the effectiveness of direct response advertising (the equivalent of TV infomercials). This targeting takes many forms, but all have demonstrated an ability to lift conversion rates over “run of network” advertising. As targeting technology improves, and as the data that publishers and networks collect about users increases in quantity and quality, we will see a better ability to match the right ad to the right person, and charge more for that ad.

5. Getting serious about monetizing non U.S. traffic

The U.S. led the way on the internet, and for a long time the U.S. dominated overall Internet usage. In the past couple of years this situation has changed. China passed the U.S. as the country with the most internet users this year. Top sites like Yahoo, MSN, Facebook and MySpace all have more users internationally than in the US. Serving an international user costs the same as serving a U.S. user, but making money from an international user is much harder. In 2009, I expect Internet companies to get serious about making money from their international traffic.

The US market represents about half of all online advertising, which is partly what makes monetizing international traffic so difficult. Building up direct ad sales teams (and networks) internationally will partially help to bridge the gap, but this will not be enough. As noted previously, in Asia direct monetization models (i.e. selling things directly to users) have proven to be a better business model than advertising. U.S. companies will need to understand and embrace the direct monetization models that have worked well overseas, principally mobile monetization, premium subscriptions models and digital goods models based on selling greater functionality, scarcity or status.

Silver linings to dark clouds

These trends will benefit some internet companies but disadvantage others. I hope that your company finds the right way to navigate these shifting shoals. Let me know if you agree or disagree with these predictions, or if there are other trends that you think I’ve missed.

  • http://www.flixster.com fake joe greenstein

    WSJ guest columnist? Wow, someone is moving up in the world…

  • http://blog.mikezhang.com Michael Zhang

    Nice article! I have concerns, however, about the prediction that Facebook and Digg will see the benefit of the advertiser flight to quality. I think what web 1.0 did was to turn content to commerce, and what web 2.0 is doing now is to establish community. In the content->commerce loop, a natural business model was to sell advertisements to capture some of the value of selling online. The reason that so many web 2.0 companies fail to make a profit is that they are still very attached to the old model of squeezing profit out of advertising. I believe there exists a brand new business model for people to capture (and create) value through the establishment of communities.

  • http://techlang.com/ Jason

    Web 2.0 leaders should think of emerging market such as Brazil, China, India.
    Social Networks should find new creative ads: behavorial, or “relationship” referral advertising.

  • http://www.brightroll.com Tod Sacerdoti

    At a high level, I agree with most of your thoughts.

    #3 – I would suggest the prediction be “Advertiser Flight to Quality.” Although Web 2.0 companies may benefit from this trend, they will not be the largest recipients of benefits. Traditional media brands that have successfully emerged as Internet leaders, such as NYT, CNN, Forbes, etc., will benefit the most as a result of this trend. It is very hard to argue that Digg or Facebook are considered “quality” just yet.

    #4 – Pricing going down may be just what the monetization doctor ordered in some categories. Branded advertisers, in particular, feel that key categories – mobile, video, etc. – need to come down in price before sizable ($5M+) budgets are allocated on a per campaign basis, particularly when compared to television rates. This may help facilitate the broader movement of ad dollars to the web in 2009.

    #5 – This is a very tough prediction to make, as most of the monetization leadership (both tech and expertise) comes out of the U.S. and most U.S. companies are pulling back. I would propose that this will be the larger trend in the recovery period, which is more likely to be 2010, not 2009. However, any automated platform, including Google Adwords, RightMedia and the Doubleclick exchange, may see big international boosts next year.

  • http://www.fantopro.com/ Steven Savage

    I have to say this sounds spot-on. Most of what I see in the global economy and home in Silicon Valley is the same thing – the internet and various entertech is a good bargain for the dollar.

    One thing I’d also add is that the internet, consumer electronics, and entertech also yield what I call “multiple benefits.” Buy a DS and you have a gaming system that also does connectivity with friends. Buy a PC and an internet connection and have a home office, a gaming device, and access to the planet. Log onto Gaia and socialize, play games, and more – for free. The benefit-per-dollar and benefit-per-hour can be very high, often as one derives multiple benefits per dollar and per hour.

  • http://www.dogster.com Ted Rheingold

    I think you’re going to get all A’s this year or at least very close.

    Here are the thoughts your forecasts evoked from me.

    *) I agree that you say ‘cheap thrills’ and not ‘free thrills’. I think people more than ever find it okay to spend a small sum for something they really like. iPhone app, mp3 and tv stores, online games, subscribing to their favorite sites, virtual currencies are all becoming acceptable spending.

    *) While some web2 leaders will really pull away, I think others will tread water. They’ll be hamstrung by new leadership that are policeman and no longer navy seals. They’ll mistakenly believe the falling competition is due to their strength when really it’s recessionary challenges. They’ll spend so much effort monetizing in a hard market, they’ll de-prioritize product leadership. By 2010 some 2008 leaders will get overtaken by faster/better/cheaper. It will be possible to spot these falling giants by mid-2009. Who is innovating through the recession?

    *)I don’t expect advanced targeting technology to make advertisers happier at the kind of scale most huge web publishers need. I think a lot of money will be lost. A lot will also be spent, but only short-term.

    *)There’s a giant reward for the business that can become the real international AdSense. Display networks haven’t been able to do it. Real-time worldwide contextual ad marketplace would be an epic business to start right now ;)

  • http://www.tagged.com Greg Tseng

    Great post Jeremy! I agree with all of the predictions and most of them benefit Tagged – phew :)

  • http://thefloggingwillcontinue.com/ Daniel James

    Good stuff. I am very sceptical about the long-term prospects for the incentive marketing monetization methods in 2009; I just can’t believe that most of the offering parties are getting long-term value from ‘take this trial get the virtual currency you actually want’ offers. However, the CP-Acquiring companies must be running the numbers, and the offers have yet to all vanish, so I may have to swallow my scepticism on that one.

    I don’t know much about advertising, but I find the idea that FB or Digg represent ‘quality’ placement baffling. We tried FB ads and the performance was abysmal (though it was a while back). There’s also significant ‘what is my ad next to’ issues as with any UGC site. Still, I wish everyone well in getting the $$ in next year.

  • http://www.mynewplace.com John Helm

    Great post – as a buyer of advertising I can only hope your predictions about the ad cost dropping come true!

  • http://www.mogees.com David Li

    Another insightful post. I agree with the predictions, especially 1, 2, and 4. Just to throw another one out there – I think we’ll see a surge in mobile internet use in 2009. With improved browsers and price point closer to $100, smart phone sales will continue to grow despite a drop in overall mobile sales. Most major consumer Internet players will need to develop a mobile strategy if they don’t already have one.

  • http://www.mochiads.com Jameson Hsu

    Great post! I agree that finding a scalable way to monetize international traffic is going to be very important. That was one of our focuses for 2008 and it’s been paying off very well.

    One point to note about games growing in down times is that we saw tremendous growth in the casual downloadable space in the last slump. There’s no doubt that online games will flourish in the coming years. Then again I’m a bit biased. :)

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  • Patriot Ben

    I am begging all VCs and entrepreneurs out there: STOP investing time and money in projects that are designed to get more Americans spend THEIR time and money on products and services that have NO MERIT. America needs people to go back to work, work harder, work more, and when they do not work – work for the greater good and prosperity of the U.S. population. The LAST thing America needs is people spending more time and money on useless applications and web services, or spend money on virtual goods. This has net negative effect on the U.S. GDP per capita, and onthe U.S. overall global competitiveness.

    If you wish to spend your time and money on backing web ventures, PLEASE spend it on ventures focused on education, empowerment, new energy, savings (in all areas), merit-based services (shipping, cloud computing, etc) , EXPORT OF TANGIBLE GOODS ABROAD, export of services abroad (not outsourcing, but rather getting Americans in the service industry paid for services by foreigners)

    Otherwise, this crisis will continue and the U.S. will see itself going deeper in depression and losing its 1st place as the world economic leader. Then all of the above (Jeremy’s post) will not matter.

  • jon miller

    v good insight – as usual

    i think i would elevate video consumption to the major trend level. 08 will be looked at as the year that online video grew up, became mainstream, produced content took its place alongisde ugc, got advertiser attention, etc. factors such as the availability of all forms of content, the election, hollywood writer’s strike, hulu, and continued growth of bb access (wired and mobile) all contributed to 08 being the pivotal yr for online video

    in 09, as a corallary to your ‘cheap thrills’ comment, online video consumption may be seen to be on a path to become the dominant form of video consumption, certainly among particular (younger) demos. if online video is then grouped as part of a larger category that includes all forms of on demand entertainment (inclu time shifted viewing, games, etc), i believe we’ll see 09 as being the yr that on demand entertainment became dominant in the overall media landscape. implications of this shift abound for media co’s as the consumer trendline is clear in its direction

  • ted wang

    good points all. the most far reaching is monetizing international traffic which i think won’t pay dividends until 2010 but perhaps that’s why you said “getting serious” about it.

    i agree with jon’s point re: video though i will say that a new paradigm is needed for finding video as traditional search doesn’t fit as well and discovery, while fun, is not the right thing for mainstream consumers

  • http://www.twitter.com/joberfest Jason Oberfest

    Thanks for the great post Jeremy.

    One point I would add to #4– I think that improved targeting will not only help DR advertisers in ’09 but brand advertisers as well. We are absolutely seeing this already at MySpace. The recent ComScore study (http://tinyurl.com/6564jf) suggests the potential for display– imagine when good targeting goes mainstream across the web.

    And by the way, I think you are being way too modest with only a B- for your ’08 predition that in-game advertising would start to become scalable :)

  • Cameron Yuill

    Prediction Number 5 is where we play and we are already starting to see that trend accelerate. It is driven by:

    (1) US publishers looking for new revenue streams to counter the downturn at home;
    (2) US advertisers demanding greater accountability on campaigns. No longer will large US publishers be able to serve an ad meant for a US consumer to an international audience. It’s wasteful (at best) and won’t be tolerated in a market where every marketing dollar in scrutinized.

    Looking forward to giving you an A+ on this one at the end of the year!

  • http://www.spectatorbytes.com Jorge Espinel

    Jeremy – Great post. Here are some additional thoughts:

    1. Scalable ad formats for premium advertising may be developed in an effort to attract brand advertisers during this tough economic period (content-driven widgets, content-rich sites, custom widget applications, etc). However, they will formally gain traction till 2010.

    2. Premium vertical leaders will probably lead the way and will most likely benefit the most from the flight to quality. Premium brands, targeted audiences and premium content will be the main criteria for advertisers to purchase premium content. Scale of social media will be used to drive users to content-driven environments.

    3. Performance display ecosystem will evolve significantly as Google and Yahoo scale their exchanges, optimization tools for publishers gain mass penetration and tools for media buyers improve. Established ad networks will feel competitive pressure but will continue to lead due to strong relationships with advertisers.

    4. Large internet players (and potentially a media co.) will get into the virtual goods game to supplement their ad-driven models. We are likely to see a major acquisition in the space.

    5. Traditional media companies (particularly newspapers) will fully embrace syndication, linking and web services models. I would expect to see additional acquisitions of online publishers (ala paid content) as these companies try to learn the new models (more likely towards the end of 2009).

    6. Cash rich companies will use this year to strengthen their capabilities portfolio via small tech acquisitions (via cash or stock).

  • http://www.playce.com Carmel Gerber

    Great post Jeremy! Gaming is a great space to be in during a down economy and social gaming is certainly taking off. At plaYce we are innovating social games by adding high-end, immersive game-play and 3D graphics. Check out http://www.playce.com to join the beta. As an expert in the space, we’d love to get your feedback!

  • http://www.charleshudson.net Charles Hudson

    Jeremy,

    Overall, I agree with your posts, especially the ones on gaming. There are some potential roadblocks out there, though, that keep me up at night. I’ll summarize the one big one below:

    I do believe that virtual goods will continue to grow at the expense of more expensive forms of consumer entertainment. However, a number of the “first gen” virtual worlds and FTP folks might be in danger of topping out in terms of audience. If that happens, the growth will have to come from new players in new places. There are some early signs that some of the US-focused players are feeling the impact of the economic crisis, especially those who rely on teens and younger folks. After all, those folks ability to spend money on the game is often a function of mom and dad having jobs that provide an allowance to fund gameplay. If mom or dad don’t have a job or kids allowances get cut back, it will trickle down and effect FTP games.

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  • http://www.cyberhomebusiness.com Leoney

    Great post. I think Social Media advertising and Online Video advertising become more scalable in this year.

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  • http://buzzerbeeser.blogspot.com Start Blogging

    These predictions are to be taken with a grain of salt. There is logic in them but we all know anything can happen. Cheap thrills will still sell but will the businesses make money from them?

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  • http://www.making-internet-money.com/ making money internet

    Nice post! Thumbs up. Another method to make some extra money online is to offer your best digital photos so-called image banks with stockphotos. Companies can draw from the images to be used for example in advertisements, magazines, leaflets or on websites, in short in their campaigns. You get paid when your image is downloaded.

  • Mike

    http://www.mingoe.com is to launch “cloud service”. What is cloud service ? I think it i has something to do with mobile application. Any thought to share ?

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  • http://www.filmgo.net/ smithindavi

    Excellent post – as a buyer of advertising I can trust your predictions about the ad cost dropping come true!

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  • http://www.dmcileasing.com Xander

    Its already 2011 and still internet is a trend. More than ever, internet has been use by many is there businesses and other ads to gain extra attention from potential clients. Social Media Marketing has been use to all forms of business, from real estates, food, dress, fashion, beauty product and a lot more!