How 475Bln customer views can lead to ZERO value

What a waist

Advertisement: What a waist

I noticed a TechCrunch article this morning talking about lay-offs at one of the top 5 advertisement networks Adbrite. It’s always sad when a company has to let people go, but that wasn’t really what drew my attention. It was actually this part:

There is a silver lining to the layoffs, or at least for those who still have a job at Adbrite: The company will now be cash flow positive and profitable, CEO Iggy Fanlo and Levine said in a phone conversation. The company had gross revenues of $32 million in 2007. He won’t discuss current revenues, other than to say it continues to grow, and that October will be a record month.

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Adbrite is a top five advertising network according to Comscore. They sell advertising for 70,000 websites and serve 1.3 billion ad impressions per day.

I may not be a top financial expert, but if these numbers are anywhere near the truth then we can conclude that one of the top five advertisement networks makes extremely low revenues per advertisement served. You would need an electronic microscope to find the revenue that they earn when they display an advertisement. I bet there are particles found at Cern that are more easily detected under a microscope than this revenue.

I do not mind that people are making a living out of advertisement. I think lots of web 2.0 startups would be willing to cut of an arm to earn 32Mln a year. But if we compare that number to the number of ads being displayed I cannot help but feel this is such a destructive, non-value creating business model. A staggering 475Bln times a year people are exposed to advertisement so that Adbrite can earn 32Mln a year. A perfect example where the transaction costs to display advertisement have dropped to zero, but the accompanying value that is being created too.

I do not know a SINGLE company that has 475BLN interactions with customers a year and only make 32Mln in revenues. It’s moronic. If you can have that much views of your product and you are unable to convert that to revenues it tells me that the business model creates ZERO value.

When will people finally begin to realise that this whole shift in advertisement from traditional media to the web doesn’t necessarily mean that the web user is really interested in advertisement. Just because you can harass people on the web doesn’t mean you should? A business model that doesn’t build value is the worst kind of model there is. And yet 90% of all web startups still seem to be struggling with advertisement a their main business model. I can’t help but think that it only leads to crazy valuations, but not to value creation. Big difference.

Let’s hope this financial crisis will put some sense into investors, entrepreneurs and advertisers. I hope they will focus on user value business models. Not only are they value based, but thy are also so much more fun to execute! I’d rather have 100.000 enthusiastic customers than 475BLN hits being ignored by the world.

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16 Responses to How 475Bln customer views can lead to ZERO value

  1. Mike Montano says:

    Hey Alexander,

    I really like the point you bring up about how much more fun it is to execute on business models that create value for users. I mean, who really gets excited about ads? Ads suck — I hate ads. But making something that people want and are willing to pay for — now that is something I get excited about.

  2. @Mike yes, it is so much better isn’t it. Monetizing on user value is the best business model there is. People that pay for value they receive make sure you keep providing them value.

  3. Pingback: The mean value of an Online Ad - broadstuff

  4. Geoff says:

    “475BLN interactions with customers a year” surely the point is that they are not interactions as they obviously get very little customer response.

    A poster advert in Piccadilly may be potentially shown to a zillion people but very few, if any, interact with it.

    Both businesses (posters & web stuff) can be profitable in there own way.

  5. @Geoff if you would get 475Bln views of potential customers would you not agree that it can’t be too hard to make more revenues than the 32Mn a year a major advertisement network makes? I’m sure it can be profitable, but I could think of a ton of things that would be more profitable considering that traffic.

  6. Wallen's says:

    Hi Alexander, I fully agree with your point on creating value for users. It’s a “must have” for any product to be successful – whether in the web sector or in any other for that matter.

    Doing a parallel, with the TV sector, channels provide value to their audience via their programs. Two main revenue models have emerged over time in this industry – advertisement and subscription. Same applies to the newspaper sector where there is a mix of both models in most cases but you see “pure” models emerging. In those industries, creating value to users brings an audience and the company selects the monetization vehicle via advertising and/or via subscription. None of these two models have emerged as superior to the other in the TV sector (though the most widespread is clearly advertising). So the question is not whether advertising is feasible in media, it is.

    However, I agree the vast majority of web companies have not successfully addressed the advertising revenue model. My feeling is that for advertising to be a viable revenue model for web companies (not necessarily the sole one), they need an excellent fit between the product format, the advertising format and the purpose of the users. So far very few web start-ups have managed this with success (Google did).
    I posted on that topic recently if you’re interested: http://tinyurl.com/65yms3

  7. @Wallen’s regarding your remark “So the question is not whether advertising is feasible in media, it is”. Is that really so? I agree that it is widespread, but the remote control and tivo are the best reasons why it really adds no value to the user experience. It is done, but people find ways around it because advertisement gets in the way of their experience (watching tv). Imo advertisement has only really proven itself to the user in terms of value in search. In most other cases advertisement is lucrative for the advertiser, the service provider, and very rarely for the user. Only if the advertisement itself contains value to the user it is viable. If it is used to sponsor something that has a cost, it is a value-lowering experience imo.

  8. Wallen's says:

    From that angle, I agree with you. Advertisement is rarely contributing to the user experience. Even with Google, it does not add to the user experience in the sense that we could have in the space taken by ads links that are more relevant to the user. From the top of my mind, the only media where ads contributes to the user experience is fashion magazines.

    The point is if the deterioration of the user experience is minimized/neutral, it is a “fair” balance between the user benefit of a free service and the need to cover costs for the company.

    Looking forward to your next post!

  9. Alexander, I have subscribed to your blog with great enthusiasm. Your thoughts here mirror many of my own. As someone who is involved in a start-up, and is faced with the challenges of achieving self-sustainability, we recognize the need to balance our ad revenue efforts with also the importance of providing genuine value for our members. In my opinion, the companies that will succeed in the next wave will be those who truly are ‘user-centric’ and create products/services/technologies that serve to improve/enhance the the quality of a user’s life.

  10. @Rich, thank you. I really appreciate it. And I agree fully ;-)

  11. Alexander,

    Spot on about the waste. Came here from ubiwar btw. in case that is of interest to you. Vy interesting blog.

    I am not sufficiently knowledgeable about the web to know whether ads work in some mysterious way nevertheless, p.ex. by raising brand awareness. As a general thing I dislike all ads with the – weird – exception of well photographed print ads.

    Finally – OT to this thread – keep looking at data security for users (as in re facebook). I greatly appreciate that.

  12. Great analysis! Google should read this before it is too late and they file chapter 11.

  13. Pingback: Google proves that everyone else executes online advertisement strategies poorly « Alexander van Elsas’s Weblog on new media & technologies and their effect on social behavior

  14. “I do not know a SINGLE company that has 475BLN interactions with customers a year and only make 32Mln in revenues. It’s moronic. If you can have that much views of your product and you are unable to convert that to revenues it tells me that the business model creates ZERO value.”

    GOOGLE is one such company (their AdSense product), at much greater scale. AdBrite’s numbers suggest an effective CPM rate of about $.067 BTW. Every social network, chat forum, photo site, and even Google-owned sites like Gmail earn Google less than or equal to that.

  15. Hi Jordan, I ended up writing a post about that here:

    http://vanelsas.wordpress.com/2008/10/21/google-proves-that-everyone-else-executes-online-advertisement-strategies-poorly/

    There is a huge difference between Google and AdBrite. Google is successful because they are able to create the right context for advertisement (search). AdBrite and other ad networks are not doing that. They display ads in the wrong context. So they won’t scale u to a level Google has.

  16. Hi Alexander, yes Google search clearly adds value to the user, and there is a difference between the two companies. But I was referring to AdSense for *content*, which provides multiple orders of magnitude more ad volume across the Web than AdSense placed alongside their search results.

    AdSense for search does show ads in the right context. AdSense for content also does this, but to a much more limited extent — there’s often no context to target and Google can only guess. I’d argue that a big reason AdBrite (and other companies like them) is in business is because AdSense performs worse on the pages of their publishers. In that case, AdBrite would be adding more value to users, publishers and advertisers than Google.

    At the end of the day, “value” is in the eye of the beholder, and the market has judged the value of AdBrite’s inventory accordingly, as it has Google’s. While it may be zero in your opinion, the eCPM rate is a factual valuation that can’t really be refuted.

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