The Web 2.0 Economic Conundrum

Regulars here know that I am a huge proponent for the little guy. Hence, the name of my blog. I want to see everyone who's publishing a blog to try to make money achieve their wildest dreams (and ours). However, there's a dirty little secret we should discuss and that's a lack of diversity among the advertisers who are making ad buys on some of the most influential blogs - those that cover tech and Web 2.0.

Quietly, an entire Web 2.0 economy has blossomed. The Web sites and blogs that cover Web 2.0 - sites that I really love - are largely supported by ads from startups that also are hoping to capitalize in the rising interest in online advertising. This creates a vicious cycle that's unhealthy for the earning potential of bloggers who cover Web 2.0.

Once again I turn to history as my guide. Back in 2001 Yahoo faced a similar problem. It was too dependent on dot-com advertisers. Yes, times were different then. Yahoo was a big company with big infrastructure. Today, to publish, the cost of doing business is zilch.

However, what's not different is that startups advertising on startups spells trouble. You can't sustain momentum. If the economy hits a speed bump it will upset the apple cart enough to cause the Web 2.0 advertising economy to sink. And while it won't spell the demise of these popular blogs, it might mean these bloggers will need to return to their day jobs.

The solution, just as with investing, is to diversify. The ad-supported Web 2.0 blogs and communities like Reddit and digg must - I repeat - must find a way to diversify their revenue streams beyond Web 2.0 related advertisers if they are to thrive as businesses. Some are doing this nicely. Others have their work cut out. Root for them.

Comments

[mako]

umm... I thought reddit was profitable because of its licensing model (getting paid to make and host sites like lipstick and slate.reddit)...

[Steve Rubel]

Mako, you're right. Noted and edited.

[Jeremy Pepper]

Geez, advertising is cyclical?!

When business models rely solely on advertising revenue, there are problems. That is why you see media shut its doors on publications that might seem like they are doing well, but the advertising and circulation is just not there. Cargo did well, but not well enough. Teen People was doing well, just not well enough so it went online only.

Will we see a shakeout in Web 2.0 companies? Of course. It doesn't take a genius to see it.

[Eric Allam]

Jeremy, I still don't buy the argument that "you can't rely on advertising" as a business model. How does google make money again? It's because they used highly targeted advertising, and utilized the long tail of both advertisers and publishers. You can rely on anything as a business model, whether that is the correct business model, though, is a different question.

Youtube cant rely on advertising, because theyre adverts aren't targeted enough.

Also, I am not sure what you mean by "shakeout" People think this is going to bust like it did in 2000. The main difference here is that there aren't hundreds of company on wallstreet. Startups have focused small investors, some none at all. If anything a company will go down quietly. Unless you decide to put your company on sale on ebay, in which case you'll go out very publicly.

[Jeremiah Owyang]

Steve

One of the things that interests me in the Web 2.0 space is the data storage needs that will continue to grow as social/cgm/rich media continue to evolve.

I'm hosting a lunch on Sept 12th --it's free for all web companies

http://www.lunch20.com/2006/08/21/lunch-20-web-expo-blowout-at-hitachi-data-systems/

[Shaum Bubblewink]

Does this mean I will not make money from my blog about Comoros? I thought with Google ad sense linking to hurricane charity I would become millionaire :)

[Mark Evans]

steve,
i agree with the earlier comment that the biggest difference between then and now is companies are structured differently - companies are leaner with lower operating costs so even if an advertising slowdown hit, many companies will be able to withstand the "storm".

[randyhoffman]

It a good observation, Steve. But as any saleperson will tell you, go after the low hanging fruit first. Those web 2.0 companies are an easier sale than, for example, convincing a media planner in Detroit that the audience on blog A is ideal for their new auto campaign. Both sales will eventually happen. The sales cycle for the planner in Detroit is much longer.

[Jeff Tidwell]

I paraphrase: Umberto Eco's Multiplication of the Media theory "If a fellow is wearing a polo pony on his shirt who then is sending the message Ralph Lauren, Inc. or the fellow?"

[Max Kalehoff]

Perhaps advertising is getting more efficient? Less wasted dollars? Less waste, less needed for the otherwise traditional pie?

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