It’s been slightly more than a year now since the markets began to slide, and there’s no doubt that everyone in the industry has a different perspective than the one they had a year ago. The Nasdaq Index, currently valued around $1,900, soared to $5,000 before beginning to come down to earth last month. The industry has changed so dramatically in such a short period that it’s worthwhile to take a step back and learn from what’s happened.
Dot-com failures and layoffs across hi-tech sectors have become a major trend this year. A lot of this has to do with unsustainable business models, declining markets, and weakening consumer confidence. Many companies have even shown strong sustainability trends from their initial round of financing but, unfortunately, were unable to move forward without supplementary funding.
Although it has become exhaustingly fashionable to talk about dot-com failures, there still remain many successful companies that continue to weather the storm in this economy. Business 2.0 put it this way: “In 2001, it will be nearly 40 times harder to raise venture capital than to get into Harvard Business School.”
What have the successful dot-coms and hi-techs been doing that separates them from the rest? Below are some notable trends, habits, and patterns.
Ad-supported revenue models. There are very few investors interested in supporting another Web property whose sole revenue stream is media sales. Most properties cannot sell the bulk of their ad traffic and have to liquidate unsold inventory through ad networks, at times on a performance basis. Furthermore, online ad pricing is predicted to drop another 10 percent or so before it bounces. It’s really a supply-and-demand issue with a few exceptions, where online ad impressions and audiences continue to grow with lower demand for advertising than expected. Ad networks are also struggling with sales despite the fact that they often sell at liquidation prices.
Most companies today require more than one revenue stream, but there are a few exceptions:
- Sites that can target a very high-profile, difficult audience (e.g., insurance companies targeting financial advisors and independent brokers because they do not sell directly to end users)
- Sites that attract a community of advisors and can continue to demand premiums
- Search and shopping-related sites, where advertisers have the ability to deliver messages when users are ready to buy or learn more about their products
One business model I find to be sustainable among ad-supported Web sites is the performance-based search site (e.g., GoTo and some of its competitors). Advertisers pay for results and often see strong conversions from ad dollars spent, and the affiliate sites hosting their search links have a strong monetary incentive to retain this affiliation.
Very big or very lean. A year ago, it was popular to grow quickly, as companies were still riding on forecasts and expectations (and some on dreams). Companies were spending and hiring so quickly that many agencies were hiring account people without having the accounts to assign them to. People used to be impressed by large, high-growth companies, but when the market changed, budgets tightened, development and marketing expenditures were reduced, and then the layoffs began. Aside from the large, powerful corporations, today the leaner, niche-specific companies seem to be more flexible and competitive. Whether corporate or private, savings are very attractive these days. Regardless of the state of the economy, it is always good to be highly liquid and hold a strong cash position.
Convergence. The industry is out of its infancy and starting to mature. And, as any industry matures, convergence plays a larger role. Mergers, acquisitions, and strategic company alliances have become par for the course in order to maximize efficiencies, leverage competencies, and keep costs to a minimum.
Innovators are not always good managers. Many excellent business models and creative ideas have fallen apart not because of inviability but because of poor direction and management. Companies that have a unique selling proposition, a strong market for their product, and a passion for what they are offering will not go anywhere if they don’t also have solid business direction. The new economy is still an economy, and business leaders need to provide the direction that a lot of recent start-ups lacked.
Overall industry status. Although the market is still shaking out, it appears to be stabilizing, and ad pricing is becoming more controlled. However, all the negative press has hindered online ad spending, and many key advertisers are still shying away from the Web. Ironically, the Web as a medium has become more and more cost-effective as the industry declines. Audiences are growing, and the cost to reach them is declining. Studies continue to be published supporting the cost-effectiveness of online ads. Furthermore, overall online ad spending saw a sharp increase of more than 80 percent over the past year (from 1999 to 2000). (While this is not the exponential growth once forecast, it’s certainly strong.)
Part of an industry’s growth and maturity involves sustaining new business models and comparing the habits of successful and unsuccessful competing companies, especially when exposed to different market conditions. It is hard to ignore a lot of the failures we’ve seen, but the industry is in a strong position to move forward and is showing healthy signs overall. Although the intense industry highs are gone, in many ways the online ad industry is in a healthier, more sustainable position than ever before and will continue to play a greater role in the overall advertising industry.