Last week I had the pleasure of attending the Ninth Annual Goldman Sachs Global Internet Conference in Las Vegas. Part road-show, part long-view, the conference offered a different perspective on the Internet space than that usually provided at Silicon Valley-area events. Specifically, in presenting a wide range of companies from the very small/newer (examples: Spot Runner, KickApps) to the very large/older (Ticketmaster, NY Times, IAC/Interactive Corp.), I was able to see not only how small companies were working to gain initial traction, but how large companies were working to execute operationally against the expectations of public markets.
One of the most interesting themes to emerge from the event involves the realization by companies with ad-based revenue models of a bifurcation of inventory across publishers into A) huge inventories with little/poor content quality (and consequent low CPM rates) and B) more focused inventories with high content quality (and consequent high CPM rates and other ad revenues). Barry Diller, who kicked off the conference Wednesday morning, was the first to hint at this inventory split in repeatedly noting IAC’s current theme of incubating vertical categories (including search, with the black-focused site Rushmore Drive). New York Times Digital’s Martin Nisenholtz called out this bifurcation specifically, noting that—countering many who claimed that all online content would be dispersed and therefore commoditized—high-quality, focused, and/or branded content was absolutely key to a successful ad-based monetization strategy for the web. This was corroborated by the fact that nearly every ad-based business that I saw present at the conference focused on its ability to aggregate users into tightly monetizable pools via content or user demographics. In short, 1 million die-hard skiers are better than 20 million random users any day—and maybe better than 100 million of them--at least for now.
The elephants in the room, of course, were broad social networks and user-generated content (UGC) sites. One result of making the creation of online content incredibly simple, social, and free is the rapid proliferation of publishing inventory—all those pages, videos, etc. being thrown up on the web every day by users who may or may not have any aspirations to monetize their additions to that inventory. By analogy, imagine what would happen to outdoor ad rates if suddenly everyone could instantly create a 40-foot billboard in their front yard, with whatever content they wanted on it.
The short-term solution, noted above, is to create islands of focused, related content. The longer-term solution, which is much more difficult, is to create tools and technologies that can create virtual islands of such content—so that rather than having to go to Rushmore Drive to “go deep” on black web content explicitly, a user can have that material integrated into his or her online experience implicitly. It appears that the large media companies (IAC, NYT, Glam Media) are taking the short-term solution of having the user go to verticalized, quality content locations—and they are doing well by it. Others (particularly Google, based on their comments at the conference, but also a raft of semantic-search startups like Radar Networks, Powerset, etc.) appear to remain focused on the harder problem of parsing intention within a single user experience and striving to bring high-relevance content to the user (more on this in a later post, as I am at Google I/O this week).
Personally, I think there is going to be room for both approaches for quite a while, although in the long term (7-10 years), I suspect that the latter, more difficult model will win. Think about mail: there was a time when I had to go to a central post office to send a message. At present, I can send a message to virtually anyone from virtually anywhere. In the short term, the fact is that the advertisers holding the purse strings still think largely within frameworks established during the reign of network television, i.e., vertical targeting via programming content. So while it may not yet be a brave new world for online advertising, the hard reality is that vertical content, quality content, and branded content are proving to have the greatest short-term (and probably medium-term) potential if you are building a business based on an ad-revenue model.
The challenge remains for those startups generating a proliferation of pages, views, and UGC, i.e., the broad, non-vertical, social networks. Benchmark Capital’s Bill Gurley noted in one of the conference panels that the Facebook team seems to think of itself as a utility, but the reality is that gaming and entertainment are the current, best monetization models for large social networks, citing Tencent as a clear example. If Google, Microsoft, Facebook, or someone else, however, can set loose tools and technologies to deliver the long-term potential of connecting me to meaningful, quality content—even when I don’t know exactly what it is I want—then a truly workable ad monetization strategy for broad social networks will start to emerge alongside the more transactional, gaming/entertainment models we see today. I think this is a case of short-term vs. long-term monetization, and there are only a handful of companies around at the moment with the financial resources to bet on the long-term solution.
