What Fred Wilson and the VCs don’t get about advertising | Hacker News Reader

What Fred Wilson and the VCs don’t get about advertising

pandodaily.com

42 pointsmikeleeorg12 comments

Okay, I'll risk being "that guy" who starts about adblock, but I seriously tend to forget that there even is advertising on the web, let alone that it is still a source of revenue for anyone else but Google.

I've always considered it one of those walking dead business-models, like printed newspapers, and it regularly surprises me the practice is still alive and well. I would be terrified to let my business depend on it.

> a source of revenue for anyone else but Google

My theory is that internet advertising is a zero-sum game (out of the left-hand pocket into the right-hand pocket sort of thing), but there hasn't been any serious, credible research to prove or disprove my intuitions.

And no, "serious" and "credible" do not apply to companies that sell internet advertising and point to their own (air quotes) reasearch as proof that internet advertising works.

AdBlock Plus and Ghostery for the win, by the way.

let me get this straight.. you think companies are spending billions every year on advertising without any proof, ROI figures, just solely from the seat of their pants without any research, studies, etc? I assume because a company like Walmart, for example, with a profit margin of 3%, is so flush with cash they just throw around $600 million+ every year without any thought. Amazing.

I own an ecommerce store, 10 years. I can tell you that internet advertising does more than pay for itself if you control the costs, track the sales that result from it, etc (which is standard practice in internet advertising).

That's why when GM said they spent 10m+ on facebook with a very poor ROI, it was big news. Advertisers will test new platforms like facebook, and when they fail to perform, they will abandon them very quickly.

Google has lasted this long not because advertisers are stupid, but because Google's Adwords has a positive ROI.

Still waiting for those links to serious, credible research.

Yeah. I didn't think so.

Look, I'm not going to go Google articles for you. You're perfectly capable of doing that yourself. We're talking about an industry with 140+ billion annually in revenue in the US alone (w/ about 35b spent on the internet). If you think there isn't research on it, you're kidding yourself.

What the ad-supported business has going for (and against it) is that the results are roughly linear with investment -- it's a plausible business plan for an individual to make $1000 a month in ad revenue in their space time. The business plan isn't too different if you've got a company with more staff that takes $100,000 a month to support except it's harder to cherry-pick a niche that's more profitable than average.

A company like AirBNB has to make a nonlinear change in people's behavior to succeed, it has to cross some threshold, which produces a certain kind of risk and poses a certain kind of reward. Advertising, in itself, doesn't need to be disruptive to succeed.

For big brands you're facing the need for big investments to keep up your brand. For instance, ESPN spends a lot on IP rights, photographers and other things, and that is what makes ESPN a premium site. Again, you don't have this tiny investment that explodes, but a slow and steady crawl that, in their case, is surely subsidized by the huge multichannel TV business.

Thanks - good post. That said, I don't think Fred Wilson was being unreasonable.

I'm far from an expert but I'd agree that the ad business is a tough one in which to succeed, maybe not when contrasted w/ mobile apps or gaming, but certainly when compared to other web businesses with more distinct revenue streams like enterprise solutions, etc.

Perhaps the founder of a successful advertising-based business such Bleacher Report would disagree, but he has good reason to do so!

The author ignores that there are a limited number of big ad budgets that will spend big $$ on shitty placements like ESPN, etc.

I speak from experience. Anyone spending more than $1m a year on Internet advertising is investing in "branding" more than they are investing in "conversions". If you want to take the risk that this scales, go for it.

And perhaps I should add a "why" - the universe of web properties that can convert is limited. They typically have a small audience, so the real spend for any specific brand that will really convert into actual $$ sales is limited. I'm guessing that its around the $1m mark. I could be wrong by an order of magnitude, and probably not much more.

Advertising based businesses are 100% about scale because making money with ads is about math. Take a CPM of $10. To make $10,000,000 you need 1,000,000,000 page views. Figuring each user views 10 pages (which is probably high), you are now down to something like 100,000,000 user sessions. Now, figure each user visits your site 10 times a month (which would be a pretty site), you're now down to needing 10,000,000 users a month to make $10 million a month. That is a per user value of $1 per month or $12 a year.

Now, compare that to a SAAS that charged $25/month/user. You're now talking per user revenue of $300 per year. It's a lot easier to build a company at $300/user/year than $12/user/year.

To make $10 million a month at $25/user a month you need 400,000 users. That's still a big number, but it's probably easier to reach 400,000 customers than it is 10,000,000 users.

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