A debate on the prospects for internet display advertising

There has been an interesting debate unfolding on Techcrunch over the last week on the future of interent advertising.  The debate covered both search and display advertising, but I’m going to focus only on the display side of the story here, as that is the one that is important to the vast majority of web businesses.

The debate was kicked off on the bear side by Wharton Professor Eric Clemons, and he summarised his argument like this:

  • Users don’t trust ads
  • Users don’t want to view ads
  • Users don’t need ads
  • Ads cannot be the sole source of funding for the internet
  • Ad revenue will diminish because of brutal competition brought on by an oversupply of inventory, and it will be replaced in many instances by micropayments and subscription payments for content.
  • There are numerous other business models that will work on the net, that will be tried, and that will succeed.

His main point therefore is that we should all get innovating to find those other models and get them working.

I am largely in agreement with this and I particularly like the point that since the advent of the web we don’t need ads like we used to.  Previously ads were an important way of finding information about products we wished to buy.  A simple review of our own behaviour tells us that this is no longer the case – e.g. I bought an indoor plant irrigation system this morning and I based my decision 100% on product specs and some reviews I found on Amazon.

Also relevant here is that no web2.0 company has made it big from display advertising yet – a point made in this Economist article.  If you look down the list of web2.0 winners they either outsourced the business model problem by selling out before they cracked it (Myspace, YouTube) are still working on it (Facebook, Twitter), or eschewed advertising in favour of selling services (Skype).

The rebuttal to Eric came from Danny Sullivan of the excellent SearchEngineLand blog, and he largely focused on the search advertising side of the debate before ultimately agreeing that display ads alone won’t be enough for most sites:

I agree, many sites cannot sustain themselves solely on advertising. Mine certainly doesn’t. Our revenue comes from online ads, paid memberships, lead generation and conference attendance. As a veteran web publisher, I know that in my particular space, online ads alone don’t cover the bills.

There are plenty of other examples. Right now, some newspapers are reconsidering whether they should have “opened” their sites to non-paid subscribers, since ad revenues are plummeting. But even when ad revenues were high, the ads alone weren’t covering all the costs that go into producing the New York Times. Other streams such as print ads and print classifieds were helping to keep the online site going.

Danny goes on to point out that this is little different from the offline world where advertising revenues are a fraction of total revenues, outside the sales of physical goods.  Thinking this through, given that many items that previously required a physical manifestation, e.g. music, can can now be delivered virtually, so all things being equal we might expect that advertising would be a higher percentage online than offline.  BUT, given the declining utility of advertising as a source of information and the increasing challenge of delivering interrupt based advertising are (probably stronger) forces pushing in the other direction.

  • Alan Munro

    Advertising in the old-fashioned sense of interruptive messaging foisted on consumers when they would rather be doing something else is in terminal decline. No matter what the medium, TV, radio, print, outdoor, online or whatever, people are increasingly reluctant to pay any kind of attention to this sort of messaging. You're right also to say that whatever utility there was in the notion of advertising as a source of information has long since been overtaken by the availability of much better quality information online.

    So anyone who relies on 'push' advertising for any part of their revenue really needs to think how they're going to replace that revenue as its value to advertisers falls. And for those of us in the advertising and marketing worlds, we need to learn quickly how to engage with our customers in a completely different way and build meaningful relationships that add value to their lives and our businesses. This is a much harder thing to do than making ads so it is no surprise that the transition is proving to be long and painful.

    Selling out before you've cracked your revenue model doesn't make you a web2.0 winner either, surely – that just passes on the problem to the new owner as the owners of Bebo, MySpace, Friends Reunited and many others will no doubt testify …

  • Hi Nic,

    Adverts help us to discover stuff and given the glut of information/content on the web, ironically, I think ads are needed more than ever. Perhaps the more an advert can become the visual content of a site (say, a photograph) the more useful it is as a filter to help people discover stuff. Display ads, by their very nature, are visual so they fit the times. I guess it comes down to ones definition of 'display advertising'.

  • Thanks Alan – you make a good point – having a good exit is a poor definition for 'winner'

    Nic Brisbourne, Partner DFJ Esprit

  • Hi Nic –

    Great post.

    I think part of the problem lies in the layout. It seems like ads were haphazardly placed on websites to mimic their partners offline. Just look at the placement on Facebook they keep adjusting the model but seemingly taking steps backwards in user experience. Would it not be wise at this juncture for someone to rethink the whole schematic? And see if they could garner some more valuable inventory by placing them where users would like them instead of in left over space hoping to gain revenue.

  • Thanks Stephen

    The challenge with that line of argument is that I think the average user would rather see no adverts. That leaves website owners having to trade off monetisation against the user experience. Magazines and TV stations have been doing this for years, but I think we have yet to find the right balance on the web.

  • Thanks Alan – you make a good point – having a good exit is a poor definition for 'winner'

    Nic Brisbourne, Partner DFJ Esprit

  • Hi Nic –

    Great post.

    I think part of the problem lies in the layout. It seems like ads were haphazardly placed on websites to mimic their partners offline. Just look at the placement on Facebook they keep adjusting the model but seemingly taking steps backwards in user experience. Would it not be wise at this juncture for someone to rethink the whole schematic? And see if they could garner some more valuable inventory by placing them where users would like them instead of in left over space hoping to gain revenue.

  • Thanks Stephen

    The challenge with that line of argument is that I think the average user would rather see no adverts. That leaves website owners having to trade off monetisation against the user experience. Magazines and TV stations have been doing this for years, but I think we have yet to find the right balance on the web.

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  • You raise some interesting points, indeed. This article got me thinking about the importance of relevancy… especially when it comes to displaying ads. IFor the most part, ads are always going to be out there, so isn’t better to be shown ones that you’re interested in? A strategy such as retargeting does just that. Visitors who are interested in your product come to your site and look around. But what happens when they leave without completing a purchase? Retargeting displays your banners on future sites for those visitors as they surf the web. It’s a great way to keep visitors engaged.

  • You raise some interesting points, indeed. This article got me thinking about the importance of relevancy… especially when it comes to displaying ads. IFor the most part, ads are always going to be out there, so isn’t better to be shown ones that you’re interested in? A strategy such as retargeting does just that. Visitors who are interested in your product come to your site and look around. But what happens when they leave without completing a purchase? Retargeting displays your banners on future sites for those visitors as they surf the web. It’s a great way to keep visitors engaged.

  • 'ads are always going to be out there, so isn't it better to be shown ones that you're interested in?' – couldn't agree more. The idea freaks some people out though.