Subscribe · Featured · Recent · The Cold Start Problem 📘

Inventory glut in social media

Worth reading for any internet ad junkie: Yahoo! Q3 2006 Earnings Call Transcript.

I will talk about the inventory glut. It has definitely been a huge change. You can see from the page views of a lot of the social media sites that exist today. That is going to change the market dynamics. What we hope is that it is going to bring in whole new categories of advertisers who have been focused mostly on the search side to be able to bring them to the other side of the kinds of advertising that is capable.

An interesting point is what a "glut" really means, in this case. Obviously it has to do with supply of ad inventory outpacing demand, but what kind of supply and what kind of demand? Well, according to Yahoo’s COO, the glut is being caused by the pageviews generated by social media sites.

But let’s dig into this deeper: As far as direct response goes, there’s no such thing as too much supply. For most direct response companies out there, they can precisely calculate the amount of money that is earned when a user visits their site and performs an action. Then they do the math to calculate, backwards, how much they can spend on an ad, in order to break even. As long as they satisfy that minimum, advertisers will spend as much money as they can get their hands on.

So ultimately, a glut implies one of the following scenarios:

  1. Either, they don’t know how to efficiently monetize remnant inventory well, using direct response techniques…
  2. … Or, they have so much inventory they can’t get brand advertisers to absorb it all.

In scenario #1, that means Yahoo has a clear weakness in technology, manifesting itself as an inability to squeeze money from social media sites. Otherwise, if every Flickr pageview could monetize like a Search pageview, they wouldn’t call it a glut – they would describe it as a huge opportunity. Obviously this doesn’t bode well for a company that spent 1/3 of their Analyst Day this year focused on how to incorporate social software into search and a bunch of other products. It could be that Yahoo is helping create a huge number of low-value impressions that they don’t know how to monetize.

As an aside, this problem of monetizing context-less inventory is a really big opportunity for advertising companies out there. Outside of the 5% of so of our day that’s spent on search, the rest of those pageviews go to random internet browsing, communications media like e-mail, IM, etc., and other low-context activities. Obviously, any company that’s able to figure out how to bring context into those areas, and help "irrigate" the Contextual Desert has a huge opportunity ahead of them. (I happen to work at a company which does such a thing, which is nice!)

The other scenario is just as dangerous for Yahoo. In scenario #2, Yahoo could be unable to sell brand advertising on their social media websites. As I’ve discussed before, advertisers like to buy brand media from properties that have, well, brand! And what is brand? It’s about trust, transparency, and consumers’ emotional connection with products and companies. For Yahoo to experience an oversupply of inventory there means that they aren’t effective in convincing advertisers to trust their properties enough to soak up all those ad impressions. This means that until these trust issues are resolved, it may be that the social websites they have will NEVER be monetizable at high CPMs (over $5), but instead must focus on sub-$1 stuff. Obviously, this is another huge worry for a company who is betting so much of their future on social web applications.

Ultimately though, this really should sound a LOUD warning for Web 2.0 entrepreneurs that are building social sites. Please keep in mind that:

  1. Do NOT assume you can attract eyeballs and the monetization strategy will just come together
  2. Do NOT assume that MySpace’s $900MM ad deal or YouTube’s $1.6B acquisition means there is strong underlying revenue
  3. And finally, do NOT assume that every pageview is equal, and that you can perform "chinese math" to calculate ad revenues

Ultimately, every startup out there must be very methodical in how they approach the overall market. Do you have a brand-oriented strategy, or a direct-response one? And once you pick, you have to align your personnel, resources, and product to capture dollars in each specific advertising market. If you ignore all of this, you will end up with a 1999 bubble company with eyeballs and no revenue – while this might work out for the defensive or disruptive acquisitions, you certainly will remove a lot of potential suitors of your company.

PS. Get new updates/analysis on tech and startups

I write a high-quality, weekly newsletter covering what's happening in Silicon Valley, focused on startups, marketing, and mobile.

Views expressed in “content” (including posts, podcasts, videos) linked on this website or posted in social media and other platforms (collectively, “content distribution outlets”) are my own and are not the views of AH Capital Management, L.L.C. (“a16z”) or its respective affiliates. AH Capital Management is an investment adviser registered with the Securities and Exchange Commission. Registration as an investment adviser does not imply any special skill or training. The posts are not directed to any investors or potential investors, and do not constitute an offer to sell -- or a solicitation of an offer to buy -- any securities, and may not be used or relied upon in evaluating the merits of any investment.

The content should not be construed as or relied upon in any manner as investment, legal, tax, or other advice. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Any charts provided here are for informational purposes only, and should not be relied upon when making any investment decision. Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, I have not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. The content speaks only as of the date indicated.

Under no circumstances should any posts or other information provided on this website -- or on associated content distribution outlets -- be construed as an offer soliciting the purchase or sale of any security or interest in any pooled investment vehicle sponsored, discussed, or mentioned by a16z personnel. Nor should it be construed as an offer to provide investment advisory services; an offer to invest in an a16z-managed pooled investment vehicle will be made separately and only by means of the confidential offering documents of the specific pooled investment vehicles -- which should be read in their entirety, and only to those who, among other requirements, meet certain qualifications under federal securities laws. Such investors, defined as accredited investors and qualified purchasers, are generally deemed capable of evaluating the merits and risks of prospective investments and financial matters. There can be no assurances that a16z’s investment objectives will be achieved or investment strategies will be successful. Any investment in a vehicle managed by a16z involves a high degree of risk including the risk that the entire amount invested is lost. Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by a16z is available at https://a16z.com/investments/. Excluded from this list are investments for which the issuer has not provided permission for a16z to disclose publicly as well as unannounced investments in publicly traded digital assets. Past results of Andreessen Horowitz’s investments, pooled investment vehicles, or investment strategies are not necessarily indicative of future results. Please see https://a16z.com/disclosures for additional important information.