Is Recession good for Internet Advertising Business?

Web Ad Growth Falls Off -- and So Do the Salaries
Recession to Result in Less of a Talent Crunch and Leaner Paychecks

By Michael Learmonth

Published: October 27, 2008 NEW YORK (AdAge.com)

-- The $23 billion online ad market is slowing down, and so is the once white-hot market for online-ad talent. Five years of double-digit growth fueled a scramble for talent unseen since the last boom, as hundreds of ad networks and venture-funded start-ups competed with the portals, agencies and marketers to hire anyone who knew -- or agreed to learn -- how to sell or buy and online advertising.

Michael Lebowitz, founder of Big Spaceship

But that market has cooled considerably in the past month. Start-ups such as AdBrite, Heavy.com, Imeem and Zillow kicked off what appears to be industrywide belt-tightening. Last week Yahoo announced it will cut its payroll 10%, or about 1,500 employees. In August, the number of workers employed by internet-media companies and portals reached 82,000, its biggest tally since 2001. But given that the subprime-mortgage debacle sent the stock market off a cliff, the latest Interactive Advertising Bureau statistics show that online advertising stalled in the second quarter. While few predict the overall online ad market will contract, executives are expecting some relief from the talent shortage that has plagued the industry in the past few years. That means less cutthroat competition for new hires, more job hopping among established pros and lower salaries.

"I do expect it to be easier to recruit and hire people in this industry," said Lynda Clarizio, president of AOL's Platform-A. With online advertising growing at a double-digit rate, the number of ad networks, publishers, social networks and other start-ups seeking slices of the advertising dollar expanded at a breathtaking rate. The sheer number of new outlets added complexity to a process that was already much more labor-intensive than TV, radio or newspapers.

Crowded field

Case in point: The market now includes more than 300 ad networks, giving rise to yet another layer of start-ups (PubMatic, Rubicon Project) to manage ad network relationships. None of this has made the buying and selling of online ads any easier or less labor-intensive. Bant Breen, president-digital for Initiative, said he figures it takes 2.5 times as many people to execute a digital-marketing campaign as a traditional-media campaign. "The average buyer has between 150 and 175 people calling on them looking for a piece of their budget," said 24/7 Real Media Chairman David Moore. To handle demand and added complexity, agencies instituted training programs to convert traditional-media buyers to digital. Salaries for account execs ballooned from the $150,000 range to $300,000 in some cases. The market looked so good it attracted refugees from mortgage banking and finance, who filled training programs, many on their own dime. "They knew selling but didn't know online selling," said Lisa Laredo, president and founder of Laredo Group, which offers courses on online advertising. "They would be in our classes because the ad networks and portals needed feet on the street, and warm bodies are warm bodies." Indeed, as fast as dollars have shifted online, they might have flowed even faster had there been more talent to sell it, according to Bank of America advertising analyst Brian Pitz. It's also a reason why spending online remains concentrated among the top sites and portals rather than following consumers to niche sites. Mediocrity painsThe talent squeeze on the creative side meant some pretty dismal online ad campaigns in the past few years that helped drive down ad rates. "All this money was pouring into digital, and there weren't enough people to do it. That led to mediocrity, and mediocrity didn't help the market at large," said Michael Lebowitz, founder of digital creative agency Big Spaceship. "A slowdown of cash and slowdown in the need for talent will give this industry a bit of space to breathe; too much too fast is bad for a company and bad for an industry," he said. A downturn is likely to trigger movement among the top stars in online advertising, particularly when their employers start to struggle. Those with stock-based compensation won't see that as an incentive to hang around publicly traded web and media companies trading at a fraction of their values of a year ago. "It's obvious we prefer to hire during the downturn," said video-ad network BrightRoll CEO Tod Sacerdoti. "What's more interesting is the superstars tend to get dislodged during these times." Aside from the burst of another asset bubble, there are few similarities between the internet bust of 2000 and the slowdown occurring today. First, most believe we're looking at a few years of single-digit growth, not negative growth, as occurred between 2000 and 2002. In 2000, online advertising was still experimental for most marketers; today it's part of the mainstream. Indeed, unlike in 2000, agencies are unlikely to cut any online staff and likely will use the downturn to fill or upgrade positions. "The talent war on the agency side will be as intense as ever," said Interactive Advertising Bureau Chairman Wenda Harris Millard. "I don't think there is any agency who won't tell you that they are still starved for interactive talent." Since there is growth left, companies will be looking to grow -- and to hire -- through the downturn. And for the first time in five years, there may be bargains. AOL's Platform-A is hiring salespeople, as is Initiative, which has doubled the size of its digital staff in the past year.

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Death by a thousand cuts: cost cutting and moral stress at the NYT and the IHT

This article in the IHT, To survive, net start-ups slow their metabolism, spoke of a web company director saying how wave after wave of lay offs was bad for morale, and this time round, he had cut a third of his staff.

Firing people is one of the reasons I got out of the corporate world - what one person described as moral stress - so I don't say this lightly.


The NYT and the IHT has been relentlessly cutting its cost base for as long as I can remember, but as senior execs somehow, in someway try to juggle their 2009 budgets, I'd say, and I hate to do so, go for it


That is to say, if you're going to fire a lot of people, better to do it one go, NOT before Christmas (that is one of the great corporate cruel and unusual punishments) and then let the remaining people go on into 2009 not living in fear for their jobs. Better that, than death by a thousand cuts throughout 2009/2010 with an obvious impact on staff morale. And staff morale in many areas of the IHT, I am told, as recently as yesterday by someone on the business side, is NOT good. (Caveat emptor: that's ONE person's view.)

It's surprising how many companies don't get this, especially in businesses, like newspapers, where human input is so vital for the quality of product output.


To survive, net start-ups slow their metabolism
By Brad Stone and Claire Cain Miller
Monday, October 27, 2008
SAN FRANCISCO: Silicon Valley has always been a land of big, bold dreams. In the first Internet boom its start-ups either grew fast or died trying, sometimes spectacularly. The casualties of the bust, like Pets.com and Webvan, became legendary.
In this downturn, say investors and entrepreneurs, start-ups are adopting a strategy that they hope will let them hang on instead of flame out.
To preserve cash, many tech start-ups are rushing to lay off employees and cut expenses. They are shelving their dreams of Google-size riches and getting small, humble and thrifty, all with the more modest goal of surviving the coming economic winter.
Once upon a time, an unprofitable Internet start-up like Zivity, a social site that revolves around photos of models, might have turned into just another dot-bomb. Though it has paltry revenues and just 20,000 registered users, the company pays only $8,000 a month to rent its offices in San Francisco and has received $8 million from investors. This month it laid off 8 of its 22 employees — saving enough money to stay alive through 2011 and survive even a prolonged recession.
"We think we have a valuable product," said Cyan Banister, Zivity's co-founder. "We should be able to weather the storm."
Even in normal economic times, a majority of start-ups fail. But the same factors that have made it so easy to create Web 2.0-style start-ups — low fixed costs, access to inexpensive overseas programmers and cheap ways to advertise online — also make it relatively easy for even faltering companies to cut back their operations to the bare minimum and hang on through a slump.
Web start-ups "don't fail in the same way they used to fail," said Brad Burnham, a partner at the venture capital firm Union Square Ventures, adding that the previous generation of Internet companies lived hard and died young. Knowing when to pull the plug on the current crop of more frugal companies is now "different, more subtle, more problematic," he said. "They don't run into a wall."
The Web companies in this new generation are so efficient with capital that venture capitalists "may not have the plug in our hand," Burnham said.
The only certainty in Silicon Valley is that survival is quickly becoming more challenging. The growth in online display advertising, which helps fuel the new Internet ecosystem, is declining. Venture capitalists and other investors in start-ups, like hedge funds, are cutting back. The market for initial public offerings remains closed and potential acquirers — Google, Yahoo and the rest — are deep in their own problems. Many entrepreneurs and deal makers agree that a shake-out is indeed coming.
Venture capitalists have begun preaching frugality, urging the start-ups they have invested in to cut costs and get profitable. Their advice shares themes: cut employees, do not count on raising more money and move quickly.
The entrepreneurs appear to be listening. AdBrite, an online advertising network in San Francisco that raised $35 million in venture capital, recently laid off one-third of its staff, or 40 employees, to get to profitability next year. The company's chief executive, Iggy Fanlo, ran the e-commerce site Shopping.com during the first dot-com bust, and he said he recalled how wave after wave of layoffs sank morale.
"I had gone through this before and we had death by a thousand cuts," Fanlo said. "I wanted to credibly look people in the eye this time and say we are profitable."
Every day seems to bring a new round of layoffs. In the last two weeks, the music site Imeem, the social search site Mahalo, the visual search engine Searchme, the real estate site Zillow, the Internet radio site Pandora and the social network Hi5 all cut as much as a quarter of their employees.
For many entrepreneurs, the lone goal has become survival. At Seesmic, a video blogging service, the day of reckoning — when it runs out of the $6 million it raised in May — will come in three years. To make the money last, Loïc Le Meur, the chief executive, recently laid off seven employees, or one-third of his staff, and cut all projects not directly related to the video service.
"If I can't make this work in three years it will be a failure," Le Meur said. "If I can and I get through this, it will be much stronger."
Even companies with less than stellar track records and revenues say they can live through a protracted slump.
Lala, a music site based in Palo Alto, California, has scrapped two music services and recently began a third site in conjunction with the major labels. The company raised $35 million three years ago and, thanks to financial prudence, has $20 million in the bank. It recently delayed plans to double its staff and it put its excess office space up for sublet.
Lala's founder, Bill Nguyen, expressed a measure of relief at the chill in the Valley. "This whole economic crisis allows me not to have to grow," he said. "I view this as a free hall pass."
That wholesale resetting of expectations might be the biggest change to settle over Silicon Valley. Instead of aiming for blockbuster public offerings or market-shaking acquisitions, most entrepreneurs now just want to endure. But if not enough people use these start-ups' services and revenue does not grow fast enough to attract potential acquirers, mere survival may not look so good.
At Faraday Media, a Palo Alto start-up that is trying to create a personalized version of the Internet for its users, there is no revenue, no office space (the five employees work from their homes) and little chance of raising any capital from the newly miserly angel investors who would otherwise support a start-up of its size.
Chris Saad, Faraday Media's founder, said the company saw no reason to give up. "We are committed to the idea that the company and technology we are building is fundamentally going to reshape the Web," he said. "We are committed to investing our time into this for as long as it takes."
If these skeletal start-ups do succumb to the downturn, firms like Sherwood Partners, which specializes in bankruptcy consulting and shutting down companies, will be waiting. Sherwood Partners has not yet had the kind of activity it witnessed during the last bust, but Martin Pichinson, a partner at the company, is preparing for a burst of new business as many start-ups acknowledge that just because they can survive does not mean they should.
Failing start-ups "are already out there, and we are starting to close some of them, when investors say it needs to be done," Pichinson said.

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Internet advertising is over-rated.

I've blogged before that in MHO, internet advertising is over-rated and will increasingly prove so to be.....

Financial turmoil catches up with online advertising
By Eric Pfanner
Sunday, October 26, 2008
PARIS: Are you clicking "close" more often, to work your way past advertisements that get in the way of your Web browsing?
If you are, it is because Web sites are trying harder to attract advertisers, one symptom of a slowdown in the previously runaway growth of online ad spending.
"Publishers are being much more flexible, because they're trying to attract the money," said Nigel Morris, chief executive of Isobar, a digital advertising agency owned by Aegis Group, based in London.
Until recently, attracting money to Internet advertising was hardly a challenge. With spending racing ahead at 30 percent-plus rates, everyone - from Web 2.0 start-ups to the media giants of the offline world - was trying to get a bigger piece of the action. Some analysts said online advertising might even prove immune to the effects of the global credit crunch, as money flowed onto the Internet and out of newspapers, television and radio.
Now it is increasingly clear that Internet advertising is also getting hit hard by the economic downturn. Spending is still rising, but growth has slowed sharply, to low double-digit percentages in major markets like the United States and Britain. And some kinds of Internet advertising are faring considerably worse.
"What's happening in the economy is clearly pulling growth down much more quickly than people expected even a few months ago," said Ian Maude, an analyst at Enders Analysis in London. "It's certainly a grim outlook compared with what we've gotten used to over the last few years."
The reversal has been particularly striking in Britain, the world's most advanced market for online advertising. About 20 percent of British ad spending goes to the Internet, the highest percentage of any large country and more than double the worldwide average. Online ad revenue in Britain is nearly as high as in Germany, France and Italy combined.
Enders Analysis still expects online ad spending to rise by 18.5 percent this year in Britain. But that is less than half the growth rate of 2007. And most of the gain is going into one advertising category - contextual ads that are sold by Google and other search engines and shown alongside responses to users' queries. In the first half of the year, 58 percent of Internet ad spending in Britain went into search, according to PricewaterhouseCoopers. Google mopped up 87 percent of that amount, according to Efficient Frontier, a specialist in search campaigns.
Search ads, which often link users directly to e-commerce sites, offer budget conscious advertisers the prospect of instant gratification. Online ads whose payoff is less immediate - screen-covering "interstitials," for example - are doing worse. Spending on online display advertising in Britain fell to $497 million in the first six months of this year, from $575 million a year earlier, according to the research company Nielsen.
While weakness in display advertising has been most pronounced in Britain, analysts say other markets, including the United States, are showing softness. And new online formats, like video advertising, are also growing more slowly than analysts had expected.
Eva Berg-Winters, an Internet analyst at PricewaterhouseCoopers, said the financial crisis had made advertisers more cautious. A year ago, they might have been willing to experiment; now they are more likely to stick with the tried-and-true, like television.
The thinking, she said, goes like this: "Nobody is going to fire me if I do that, whereas if I spend money on online video advertising and all I get is a few page impressions, that could be risky."
Old media are still losing market share to the Internet, but not as quickly as some analysts had predicted they would during the economic downturn. Rob Norman, chief executive of Group M Interaction, a digital advertising unit of WPP Group, said one reason was that some marketing managers prefer television or print because of a need to reach the largest possible audience with the minimum amount of spending.
For start-up companies seeking to develop the Internet as a mainstream, ad-funded medium like television, that is bad news, at least until the economy improves. Their founders have dreamed up myriad business models based on tapping online display advertising to make money from blogging, social networking, music and video sharing and other Web 2.0 services.
Amid the economic downturn, "there's definitely going to be a flight to quality - known Web sites, companies that we know are strong and will be around next week," said Debra Aho Williamson, an analyst at eMarketer, a research firm.
As Web powerhouses like Google consolidate their strength, analysts say, there are already signs that the "long tail" of niche sites is getting squeezed. Growth is slowing for some Internet advertising networks, which group together space available on such sites into a single ad buy so that marketers do not have to deal with each individual site. One network, Adbrite, said this month that it was laying off 40 of its 100 employees.
The networks have made vast amounts of space available to advertisers. That has contributed to a general drop in the price of online display ads, said Morris, of Isobar. For advertisers, who often buy ads based on the number of "click-throughs" they deliver, that can be a good thing. But for niche sites, that may mean tough times.
"If you're doing a 'long tail' buy, there's enormous downward pressure on price there," Morris said.
The popularity of social networking has also created a vast new pool of available advertising space, much of which has been hard to fill.
Simon Levene, a partner in London at Accel Partners, a venture capital firm in Silicon Valley with investments in Facebook and dozens of smaller Internet businesses, said as many as a third of venture-backed Internet startups worldwide could fail over the next two years.
Levene said he remained optimistic about the prospects for Web 2.0 companies and other digital startups. Accel recently invested in AdMob, a specialist in mobile advertising, for instance.
But in order to survive, some Web companies may have to look beyond advertising, Levene said. He added that he was urging some companies in the Accel portfolio to consider charging users subscription fees for premium services, for example.
LinkedIn, a fast-growing social network for business users, has benefited from such a model, generating a majority of its revenue from nonadvertising sources.
The company has also maintained its appeal to venture investors. Last Wednesday, it said it had raised $22.7 million in new financing from Goldman Sachs, McGraw-Hill, SAP and Bessemer Venture Partners.
With other sources of revenue, Levene said, "at least you're not worried about whether an agency will call up and say, 'We're going to put an ad on your site."'

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