Rethinking Online Ads 2.0

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Henry Blodget, who's been truly brilliant at Silicon Alley Insider, posts intelligently about Nielsen's report Wednesday that online advertising fell from August to September.

We continue to believe that we may be in the first stages of a cyclical downturn for advertising and the Internet sector--one that could affect not only start-ups and second-tier players but majors like Google (GOOG), Yahoo (YHOO), AOL, et al.  Such downturns do not begin suddenly, and they are not instantly obvious (except in hindsight).

I see you and raise you one, Henry: I think this could be a particularly nasty downturn in online advertising—very similar to the first time online ads crashed at the high middle of the last bubble. I also think this is the best opportunity for social networks like Facebook because if someone can figure out how to make ads work in that environment, it's game over. Hence the Facebook mania these days. But I'm getting ahead of myself...

Those of you old enough to remember Web 1.0, will remember the pattern: Money started to flow into the baby Web because advertisers and agencies were surprised at the early click-through rates on their flashing banners and popups. Who could believe that consumers were so hungry for this kind of advertising? And yet, in the early days, they clicked with abandon. Of course, that fell off sharply over time. Why? I always believed that the folks who were clicking on ads in those days were so new to the Web that they had poor mouse control--they were clicking to make that damned blinking ad go away. Once they figured out where they were, the learned to ignore the ads.

Something similar is going on now. If online advertising were working, it ought to be increasing as we move from the end of the summer to the fall. (Look at magazines, which are starting to put on their winter weight.) No, it's becoming increasingly clear that online advertising doesn't really work for the most part. Yes, search-directed advertising totally works. If you're searching for  "hotels in Hawaii" and an ad comes up offering you a low, low package deal, you'll click on it. And if you go to certain vertical sites, such as edmunds.com, and you get hit with auto ads, that works too. The rest of it, in my opinion, is particularly useless.

Of course, it's cheap, and that appeals to the customer and the agency. But you get what you pay for...

Again, this is why I think the best new opportunity for killer ads online is what my pal, Seth Goldstein, calls "social ads." They work in the same way that search ads work--they have an immediacy and relevance that, if done properly, are utterly compelling. These are "smart" ads because they "know" you. They know who your friends are and they know what you like. Putting those two data streams together is dynamite. Imagine an ad that knows you play Scrabulous all the time with your pal Michelle. And imagine an ad that pops up some day saying, "It's Michelle's birthday in 10 days. Maybe this lovely custom set of Scrabble tiles would be appreciated." That's advertising that works.

Comments

[Greg]

Well, I know that my B2B company will be spending about 25% more in Google search ads next year. B2B is lagging B2C. I think that this pony has a lot more riding to do. But yes, I do believe that eventually text search ads will slow down or change. The question is, can Google anticipate and capitalize on those shifts. Video is coming into its own and there is a tremendous potential here. Local search also has more room for growth.

[Steve Baldwin]

Good piece, Josh. I'm definitely in the camp which believes that there we're in the early part of a shakeout. There are so many competing video sites, search engines, social networks, etc., each of whose future depends on obtaining a completely unrealistic market share that a shakeout is inevitable. This is a given.

Google's future in a post Web2.0 world is more uncertain. As you indicate, it's the largest practitioner of CPC-based advertising, and CPC has basically propped up the whole online ad industry for several years. Take search away and you've got something that's basically just limping along.

Problem is that I don't think that Google can keep growing forever, and its stock price is dependent on its doing this. Sooner or later, its growth will plateau, and that sucking sound you will hear is billions of dollars emptying from the pockets of speculators. This in itself would be a large enough shock to depress the valuations of many other online ad properties.

Lots of road kill ahead - it should be fun!

[Jim]

Nobody has demonstrated anything close to this yet, even on Facebook.

What's more, only Facebook really has the data available to do what you suggest. The best third-parties, like Seth's SocialMedia, have to offer is data keyed off what users enter. Behavior never really enters (e.g., SocialMedia sure as hell doesn't know what I do on Facebook outside of their apps, but Facebook does).