Andrew Chen Archives

One of my top 25 search queries is “recession advertising” so I thought I’d expand on this topic a little bit, since important parts of the economy continue to implode and the folks who are thinking about business models should be worried.

Ultimately, the dynamics here are complex and uncertain, but here some of the key trends worth watching if you’re an advertising-based startup:

1. Accelerating movement of offline to online ad spend
2. Brand areas weak, direct response will be less affected
3. Weak areas to watch: Video, social networks, communication, etc.
4. Rise of direct-to-consumer revenues?
5. Timing is everything

Let’s dive into these topics more below…

1) Acceleration movement of offline to online ad spend
The first key issue revolves around the fact that advertising spend is already shifting online from other types of media. In the direct response sector, classifieds are obviously moving from newspapers to services like Monster and Craigslist. In brand advertising, dollars are moving from TV onto high-quality publishers on the internet. An article from AdAge last year articulates this theory:

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.

The point is, when your marketing wallet shrinks yet the market gets even more competitive, then companies in crisis will start incorporating methods other than the tried-and-true. Even though a lot of brand-based advertising has horribly opaque measurements – clickthroughs, surveys, and other gross metrics don’t provide much – it’s still better than the TV ad sales guy who asks for huge upfronts without providing much in transparency.

So consider this movement of dollars from offline to online a big plus for any ad-based startup.

2) Brand areas weak, direct response will be less affected
Of course, as the quote above alluded to, the strength of a company’s online advertising revenue has a lot to do with the kind of advertising that the company enables. For companies that are focused purely on brand advertising, there will still be hits in budget as the typical reactions – a flight to quality, a flight to metrics – affect brand-oriented startups.

So if your world is focused on engagement, eyeballs, and branding opportunities, things may still get worse before they get better.

On the other hand, the more transactional and close-to-the-money your company is, the more you can expect your revenues to grow and maybe even thrive during this time. These include companies in the following lines of business:

• ecommerce
• search
• classifieds
• shopping comparison
• remnant ad networks
• lead generation
• product reviews
• etc.

No matter how bad things get, from a relative standpoint the above businesses are still much better than direct mail, yellow pages, newspapers, and the like. The competitive pressure may make these industries shine – and Google will only get stronger!

3) Weak areas to watch: Video, social networks, communication, etc.
Unfortunately, some of the weakest areas for online spend during a recession are also some of the hottest spaces for startups right now. In general, startups based in video, social networks, and communication applications are some of the most brand-dependent companies out there. The problem is that generally, they have a hard time monetizing pageviews because users aren’t in a buying mindset when using the products.

Because of this, you need to be at a critical mass point to be relevant to agencies – and of course, this bar can be expected to rise over time in the case the economy is sputtering. Why spend a dollar with a no-name publisher when you can buy premium inventory for relatively cheap CPMs?

This is not to say that there won’t be significant opportunities in this space. For example, I remain quite bullish on web properties like MySpace and Bebo, even as they’re brand-focused, because they are attached to organizations that know how to sell brand-based advertising. Similarly, the trends in vertical ad networks provide an interesting opportunity for startups to partner with more established media companies to drive higher revenues as well.

4) Rise of direct-to-consumer revenues?
In the case of a long period of recession, another key opportunity will be for brand-oriented properties to transition their businesses into direct-to-consumer opportunities. Does it surprise you that YouTube is looking into affiliate-based revenue ideas? Or that Slide is thinking about direct-to-consumer opportunities as well? These are smart folks, and they understand that unlike brand advertising, if you can get direct monetization to work, it’s stable, scalable, but just very very hard.

And of course, virtual goods fits into this as well, but you all knew that.

The difficult part about these approaches is that unlike ad-based models which allow you to monetize 100% of your audience in one fashion or another, transactional revenues can usually only squeeze cash out of 1-5% of your audience – so what do you do with the rest of them? Are they just loss leaders?

Similarly, it seems that the best transactional revenue models have to be “productized” into actual features within the web property. Building a virtual goods infrastructure is not an easy task, nor is it simple to convince users that all those digital bits actually have value. It’s not something that’s as easy as copying-and-pasting some Javascript code onto a page to display ads.

5) Timing is everything
And finally, I’d like to close this post with the observation that in the advertising world, particularly in new media channels like online advertising, timing is everything. The brand-oriented web properties that exist today were built in the 2003-2005 era, when brand advertising wasn’t so healthy. Similarly, Google was created during a period where online ads was out of vogue, and they had to figure out a model that works.

For the new startups that are building their business plans from scratch today, I think there remains tremendous opportunities in the advertising-supported model. It pays, as many investors can attest, to be counter-cyclical. Perhaps the startups being incorporated this year who reach scale 3-4 years from now will be the ones that really kill the TV ad market by doing things we can’t even imagine today.

Good luck! I’m going to YPulse tomorrow – Foo was great – and will be back blogging in no time.

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