The Economics of Online Advertising

Mark Jacobsen pointed to a sobering post by Jeremy Liew on the Lightspeed venture blog about the economics of online advertising. Entitled Three ways to build an online media business to $50m in revenue, the article does the math:

  • At the $1 RPM (CPM/CPA/CPC) level achieved by most general sites, you need 4 billion page views/month.
  • At the $5 RPM level achieved by demographically targeted sites, you need 800 million/month.
  • At the $20 RPM level achieved by highly targeted sites, you need 200 million/month.

That’s a high bar. This may be why more entrepreneurs are going for low-investment sites that don’t need an exit but provide “lifestyle businesses” for their owners. (More on that another time.)

The other option, implicit in Chris Anderson’s long tail hypothesis, but not mentioned by Jeremy, is that you aggregate a lot of other sites. There are different models for this: Gawker and Weblogsinc launched multiple sites, publishing blogs like they were books, with some expected to succeed and others to fail; FM Publishing (in which I am an investor) doesn’t aggregate ownership, but provides marketing services to an aggregate of clients.

In addition, there’s still a huge amount of room for growth in internet advertising. Paul Kedrosky’s been studying the latest reports from the Internet Advertising Bureau, which show internet advertising at $16.8 billion for 2006. If I recall, tv advertising is at about $80 billion, so there’s considerable room for growth as the internet continues to draw attention away from print, tv, radio, and other old media.

Paul also posted a great chart showing the growth over a decade of internet advertising:

The bars show the quarterly internet ad revenue since 1996; the trend line shows the growth rate. (Paul doesn’t say, but it looks like annualized growth rates, not quarterly, since I don’t see some of the ups and downs I’d see based on the quarterly bars.)

Paul notes “A fun factoid: We have now crossed over and are doing more in Internet advertising per quarter than we did in all of 1999, the tail end of the prior boom.”

Update: I just learned that Jeremy is giving a talk on this subject entitled Web 2.0: Show Me The Money at the Web 2.0 Expo. Should be a good one.