“The softening advertising market.” “A slowdown in advertising.” “Those ever-shrinking ad revenues.”
These are typical of the excuses used in nearly every press release I’ve read lately to explain why yet another dot-com company is going belly-up. “Wow,” I thought to myself as gloomy press release after gloomy press release crossed my desk, “that’s some softening!” New York Times Digital is just the latest company to point to softening ad revenue as the culprit behind its layoffs.
Of course, it couldn’t be that all these companies were poorly run, over-staffed, ill-conceived ventures from the start, could it? No, it must be the softening ad market.
But just to be sure, I decided to take a close look at the numbers to see what they could tell us.
Ad Revenue in 1999 and 2000
If you take a look at this chart, you can see that although ad revenue softened a little from 2Q to 3Q 2000 ($2.124 billion to $1.986 billion), the figures for both quarters were decidedly up from those for 1999 ($934 million and $1.217 billion, respectively).
In fact, total ad revenue for 1999 — $4.621 billion — is less than the combined total of the first three quarters of 2000 ($6.063 billion). (All these numbers, by the way, come from the Internet Advertising Bureau.) I’m no accountant, but those numbers don’t indicate a softening of ad revenue — quite the contrary. So where’s the disconnect?
The answer is pretty obvious. There is no softening of ad revenue; it’s actually growing quite nicely, thank you. But there is quite a bit of softening in loose VC money. VCs are a little like the Marlene Dietrich character in “The Blue Angel.” One day you’re a respected professor with a good idea, and the next thing you know Dietrich has you wearing clown makeup and wondering where your life went.
“The Next Big Thing”
VCs like to invest in “The Next Big Thing.” They want every company they invest in to be the next Yahoo or DoubleClick. As hard as it is to believe now, a year ago I sat in a meeting with investors whose advice was: “Don’t worry about revenue. You should be hiring as many people as possible right now.”
Well, how many people can the Internet advertising economy support? All the numbers indicate that the Internet ad revenue haul in 2000 will be $8 billion. Not too shabby.
Let’s suppose that every employee costs around $100,000 to keep around. That includes salary, insurance, the cost of the desks, phones, and computers, and so on — the whole shooting match. Now let’s say that each employee should be bringing in 15 percent more in profit than he or she costs to keep around. That’s a total of $115,000 per employee needed to keep going and stay profitable.
That means the Internet economy can currently support 69,565 people. These 69,565 people are needed to staff all the web sites, agencies, technology vendors, ad networks, tool manufactures — everything and everyone trying to make a living from ads. Yahoo is currently profitable, and it employs 3,000 people. How many more Yahoos can the Internet advertising economy support?
That’s it. A total of 23 Yahoo-sized companies can be supported profitably today. Now let’s take a look at how many people are currently being supported by the advertising Internet economy. In 1999, according to a report from the University of Texas, there were 2.5 million workers in the Internet economy. Obviously, not all of these folks worked in ad-dependent environments, but probably a good chunk did. Think about how many of these people worked for companies whose backers were pressuring them to be The Next Big Thing.
If you look at the rich media industry, things get worse. Assume five percent of ad revenue went toward rich media ads in 2000; that means 3,478 people can currently be supported in the rich media advertising industry — or one company the size of Yahoo
Time to Get Down to Work
So where’s the good news in all of this? For the rich media “old-timers” among us, I guess we sort of feel the way the citizens of Martha’s Vineyard feel when the tourists go home: Now we can get on with the real work.
What it means for those still standing is that we have to be smarter, faster, and more efficient than ever before. We have to deliver on promises. We have to make it work, stop making excuses, and be better informed. We have to circle the wagons. We have to get on with it. After all, we’re in a growing business not a softening one, despite what people say.
The gold miners and prospectors have left, folks. I guess we have to build a real town now. One founded not on smoke and pipe dreams but on good solid earth.
Until next week, keep it rich!