I’m going to do something that scares the pants off me.
I’m going to do math in public.
But I have to. I’ve gotta do it. I’ve been inspired by the revival tones of Dana Blankenhorn’s Monday column on old time marketing in which he looks at a few folks that have stuck to the basics and prospered. I’ve been prodded by a recent eMarketer study that tells the tale of continued growth of online advertising. But mostly, I’ve been inspired by a driving desire to make some sense of the current dot-com downturn — to understand the insanity that got us here.
So here goes: One tale that tells a lot.
As you may know, Disney is shutting down GO.com, the portal site it’s been running since January 1999. Formed from the assets of Infoseek and Starwave, GO.com has floundered since its inception, seeking desperately to find a niche. In January 2000 GO.com changed focus to “entertainment and leisure” in an effort to distance itself from other portals.
Obviously that didn’t work.
And now it’s going bust, laying off 400 workers, taking a noncash write-off of $790 million, and taking a hit of between $25 and $50 million in other expenses. That’s one big boom for a dot-bomb.
Why did it happen? The answer has little to do with any fancy theories about portals, entertainment on the Web, and first-to-market advantage. It’s not something that pundits like to ponder. Nope, this failure is due more to what our pal Al Greenspan calls “irrational exuberance,” the dot-com bubble, and some flawed ideas about Internet advertising. But the implications ripple far beyond GO.com and may eventually reach all of us.
OK, let’s do the math. Here goes. (Gulp!)
First, the assumptions. Let’s say that GO.com has 400 employees (that’s what it’s laying off, so it’s probably safe to assume that 400 is a conservative number). Let’s also say that the average cost per employee (salary, benefits, overhead) is approximately $150,000 — not an unreasonable number when you consider salary ranges for high-tech employees, rent on fancy office space, benefits, perks, and the like.
Now multiply $150,000 by 400 employees. The answer is an annual operating budget of $60 million. That’s what GO.com needs to pull in just to break even. I’m not even going to add a marketing budget. Let’s just see what it would take to keep the company on an even keel.
If we can assume that most of the income was to come from advertising (and it was, though there was income from sponsorship deals and affiliate programs), then at a very generous cost per thousand impressions (CPM), it’d have to sell 2.4 billion impressions per year just to break even. That’s sell. Sold inventory. Not just what’s served. That’s about 6,575,342 impressions per day!
That’s a lot of people viewing a lot of ads.
How was it actually doing? According to Nielsen//NetRatings data for the week ending January 28, 2001, all of the Walt Disney Internet Group combined (including Disney.com, ESPN.com, ABC.com, ABCNEWS.com, Movies.com, Mr. Showbiz, NFL.com, and Family.com) had 5,036,951 unique visitors. That’s an average of 719,564 visitors per day. At a very generous 5 impressions per visitor, that’s 3,597,822 impressions per day. For the whole network, not just GO.com. Ouch. Not enough. And that’s not sold impressions, just eyeballs.
That’s it, folks. The whole story of the dot-bomb meltdown. It doesn’t have anything to do with click-through rates. It doesn’t have anything to do with academic discussions of business models. It has very little to do with intellectual exercises as to the viability of different ad banner sizes, positions, and rich media versus traditional banner ads. Nope, the story of GO.com (and a lot of other advertising-supported sites) is that it got too big too fast and was spending more money than it could take in.
Sure you could argue that the softness in the public markets had a lot to do with GO.com’s demise, but then you’d be falling into the trap that so many dot-bombs fell into: assuming that investment is income. It’s not.
Eventually a company the size of GO.com could survive on advertising as the number of Web users goes up. Maybe. Of course, it’d have to keep hemorrhaging money until then (that’s when a good stock market helps), but if you look at the numbers I laid out above, even the Dow at 20,000 may not have helped enough.
Stories like this one should scare the pants off those of us in the online ad industry, if only because many online media outlets have similar numbers and similar problems. But it should also hearten us for the simple reason that many online failures in the advertising-supported sector have less to do with ad models and more to do with business economics. It’s not that Web advertising doesn’t work well enough to support these businesses, it’s that these businesses were doomed to fail by growing too big too fast.
It’s just simple business.
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