Is the internet bubble bursting? Again?
p2pnet news view | Advertising:- “The first internet bubble popped largely because all business models failed except for ad selling,” says Quinthar in Second Collapse of the Internet Economy Underway?
Is it possible, he asks, the last stalwart hope is itself doomed? »»»
TechCrunch reports that Lookery, a company specializing in selling ad inventory on social networks, is barely breaking even despite selling 3 *billion* ads per month. And rather than raising prices to become profitable, they’re actually in the uncomfortable position of lowering prices 40% — from 12.5 cents to 7.5 CPM. It reminds me of the (often unintentional) joke “We lose money on every transaction, but we make it up in volume!”
All this has made them so gloomy about the prospects of their core business that they’re thinking of switching horses mid-stream and resurrecting that Web 1.0 favorite: selling demographic data. I mean, it worked so well the first time, why won’t it work now?
Ok, so you might be saying “Sure, social network ads are crap, but Google’s ads are solid, right? After all, they’re set by the open market!” I thought that too, until recently I learned that rather than that market being open, it in fact is restricted by a series of minimum bids.
Don’t believe me? Search for “Flash” and you’ll see it has zero ads. In a totally free market, that means you have no competition, and thus should be able to bid as low as you want to get your ad to appear. But when you try to create an AdWord for the “Flash” keyword, you’ll see it sets the minimum price at $0.10. So even if the market (me) only wants to pay $0.01, it’s priced 10x higher than the market (I) will bear. Which is why there are no ads on the “Flash” keyword.
Said another way, there is no competitive pricing for the “Flash” keyword. Rather, the price is arbitrarily set by Google.
Now you might say “Well, Google owns the ad inventory, they can sell it for whatever they want; it’s still a free market, even if they choose not to sell it for cheap.” But wait — didn’t we just say prices are set by auction? Hm…
All this means that the auction only sets prices above a minimum. Which brings us to the $149.86B question: how many of Google’s ads have prices set by auction, and how many are just coasting by on the minimum?
Hopefully, most of Google’s ads are competitively priced via the auction. This would suggest that they’re priced “correctly” and that we’re in for no major shocks to ad revenue (and, due to Google’s market share, worldwide ad revenue).
But let’s say that some high fraction — 50%? 70%? — of Google’s ads are in fact not competitively priced, but are just set arbitrarily by Google, such as Flash’s $0.10 minimum. In this scenario, Google’s revenue is no more protected from price declines than Lookery and it’s 40% “going out of business” sale. (After all, anybody slashing prices while losing money can’t have a long future.)
In this scenario — which might be reality, depending on the data — Google’s pricing is not sustained by competition, but by a near monopolistic control of ad inventory. And in that maybe-reality scenario, the global ad market is over-priced, meaning Google and all other ad-supported online businesses are overpriced, meaning we’re in for another massive internet economy collapse if Google ever loses its monopoly and is forced to truly compete on price.
Sound crazy? It’s not nearly as crazy as what’s already happening in reality: ad arbitrage. It works like this:
You buy a really cheap adword from Google in order to direct a lot of traffic to some site. And then you fill that site with ads with high CPM and CPC (perhaps from other ad networks, it doesn’t matter). The result is you buy a click for $0.10, and then turn around and sell it for $1.00. How is that possible? Why isn’t everybody doing it?
Everybody was doing it — in huge quantities — until Google killed it. How? By raising minimum bids.
That’s right, by fiat Google leveraged its near monopoly power and raised prices to stop buyers it didn’t like (spammers) from taking advantage of the mysterious imbalance between the price of an AdWord and another network. Specifically, it means that Google clicks should be able to buy for *cheap*, were it not for Google artificially raising prices.
It also means that advertisers on other networks are unwittingly paying *way too much* for what should actually be a really cheap click. In an efficient market, the advertiser should just be buying that original, really-cheap AdWord, rather than the inflated price of an ad on the intermediate spam site.
And all this comes back to the possibility that Google’s AdWord inventory is actually overpriced, and it’s only sustainable so long that Google enjoys near-monopoly status. Once that status is gone, then all keywords — even the ones Google chooses to price out of the market — become competitively priced, at rates far lower than what Google is currently charging. Which means everybody that depends on AdWord revenue suddenly makes less. Meaning the internet economy collapses. Again.
Crazy ramblings? I wonder.
Update:
“A friend (the same one who told me about ad arbitrage) pointed out that one reason there might be no ads on Flash is because it’s a trademark. That could be —- I didn’t go all the way through to pay the minimum bid and see what happens.
But that doesn’t change the fact that there are minimum bids on *all* unused keywords, including such words as ‘blah’ or ‘quinthar’. So the general argument still stands.”
.
.Stumble It!
New York Times – New worm transcodes MP3s to try to infect PCs, July 18, 2008
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July 23rd, 2008 at 9:18 am
I wondered why all those scam sites suddenly stopped advertising on Google. Now I know.
July 23rd, 2008 at 10:36 am
For Web 2.0, there must be Bubble 2.0.
July 23rd, 2008 at 12:29 pm
“Damn! When will they finally come out with a stable release? I’m getting really sick of betas…”
If something goes wrong, they don’t look bad. This is the real reason for so called “BETAS”.
July 24th, 2008 at 12:34 am
May be the real reason is that we’ve seen TOO MUCH FREAKING ADS??!!
July 24th, 2008 at 3:40 am
ads are unwanted and thus forced on people in every devious and sneaky way possible. That’s why they’re so hated, or more precisely, why the marketers are so hated. This is also why there’s so much ad blocking, yet they still aggressively look for ways to get around that. If I wanted to buy something I’d search for it, scabs
July 24th, 2008 at 3:42 am
ads are unwanted and thus forced on people in every devious and sneaky way possible. That’s why they’re so hated, or more precisely, why the marketers are so hated. This is also why there’s so much ad blocking, yet they still aggressively look for ways to get around that. If I wanted to buy something I’d search for it, scabs. Should mention too they eat up bandwidth and waste time