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.