Why Ad Dollars Alone Can’t Support Web 2.0 Forever

Steve Rubel posts about the economic conundrum that faces Web 2.0.


The problem, as Steve points out, is that Web 2.0 is “largely supported by ads from startups that also are hoping to capitalize in the rising interest in online advertising.” In other words much of the ad dollars generated by Web 2.0 companies are derived from other Web 2.0 companies who want gain enough traffic to make some ad money of their own.

Steve draws an analogy to Bubble 1.0, when Yahoo and many other companies were far too dependant on ads bought by dot.com companies with money to burn. I was very involved in the ad-selling frenzy of Bubble 1.0, selling ads both directly and through agencies for some very popular message board sites. We were all about old media back then, however, so anything that relied on user generated content was frowned upon to one degree or another. That problem was solved when the ad programs moved from a per impression system to a per click system.

One thing we did have in common with Bubble 2.0 was that a very limited number of advertisers were buying up the lion’s share of the ad capacity. As soon as those companies went out of business, ran out of advertising money or decided that internet advertising wasn’t the best place to spend their money, everyone’s ad revenue went from very high to very low- almost overnight.

Unless some new net buyers come into the picture, the current ad game is nothing but a disguised ponzi scheme. The ones who get in early make a lot of money. Those who come in at the middle of the curve make a little money and those who come in at the end lose it all.

The issue is whether those who are in the game now see the ad game as a long term business plan or just a short term money grab. If it’s the former, perhaps the thing to do it take a little pain now by making revenue diversification a priority.

But if it’s the latter, there’s no righting the ship. It just a matter of time.

Meanwhile the band plays on.

UPDATE: Stowe Boyd says it might not be as bad as Steve and I think. I hope we’re all right- that the ad bubble isn’t as inflated as it sometimes appears and that Web 2.0 realizes it can’t survive on ad revenue alone.

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