Online Advertising Companies are Dead in the Water – Why The Industry Will Fail

31 Oct 2008

Online Advertising Companies are Dead in the Water – Why The Industry Will Fail

Author: Jim | Filed under: Economy

Times are tough out there. As the global economy sours, funding is getting harder and harder to come by… and big media conglomerates are starting to feel the pressure just as much as Wall Street. As more and more businesses turn in losses… people are going out of business faster than ever before. And the worst part? You thought you were safe!

Here’s a news flash to those of you that thought, for some reason, that the internet isn’t tied to the globalized economy… it is. The problems that the companies based in technology face can be just as gruesome as what your local McDonalds or Best Buy deal with on a day to day basis. One thing that most people trying to make money online don’t realize is that online advertising companies are pretty much dead in the water at this point in time. Let’s talk about why.

Online Advertising Speculators Create a Bubble

People throw fits when someone says there is an economic “bubble” that is about to pop. So what is a bubble? Essentially, when everyone rushes into the “next big thing,” it creates an over-hyped market where everyone is doubled-down and nobody realizes that things aren’t as good as they seem. An example of this was the technology boom in 2001 or the crude oil craze earlier this year.

An undiscovered bubble has been made in online advertising, an arena where more than 300 online-ad networks have started up over the past few years alone. The Wall Street Journal itself called online ad brokering “one of the most popular, and crowded, niches on the Internet.” Truth be told, there are WAY too many companies servicing ads right now, and they are going to get hammered because there haven’t been that many new opportunities opened up in the same period of time. In fact, it’s not even close!

The Online Collapse Has Already Begun

So yeah, there are obviously way too many competitors in this business for everyone to be the next Google. Everybody know it, yet people continue to jump in as if nothing is wrong and there is plenty of wealth to spread around. Just this month alone, JellyCloud, an ad network that had raised over $11.5 million in venture capital this year, closed its doors.

Well maybe only a few small players are getting hit? Think again. Look at AdBrite, one of the biggest companies on the net with more than $35 million in capital funding raised to date. AdBrite actually cut a whopping 40% of their workforce just to stay profitable. Time Warner said in September that its AOL unit, which has over $1 billion invested, was “experiencing softening in major ad categories.”

Online Ad Networks Anxiously Seek Suitors

Now that everyone (except for you) understands that the industry is in chaos, people have been scrambling about looking for someone to potentially buy them. People want to jump ship… and that is never a good sign. I mean come on, I support around 6-7 internet marketing networks on this blog alone and more contact me every day! “Ad networks like Burst Media, the 17th-largest by unique visitors, and Collective Media, the 16th largest, say they are both seeking buyers” according to Emily Steel of the Wall Street Journal. What to make of this? Companies would prefer to be bought out then to continue their operations in vain.

No More Funding… Get Ready for the Long Haul

In good economic times, people are more than willing to open up their wallets for advertising and whatnot. Marketing companies are feeling constrained now because nobody is spending, and nobody is funding. It used to be a case of simply asking for money… and you’d have instant venture capital. Now, not so much… and there is a big panic all around an industry where companies made big bets, assuming that things would be recession proof all the way. In reality, lots of ad deals that were in the pipeline are being reduced or pulled completely.

This morning (October 30th), BMO Capital’s Leland Westefield gave us a fresh look at how the online ad industry have really fared through hard times. Westefield noted that for the ad business, this will be “an unparalleled recession in severity and duration in the post-World War II era.” As consumer and commercial spending continues to fall into the red… it’s going to be rough sailing for ad companies that were enjoying consistent growth in the post-tech bubble era.

So What Can You Do? Looking Forward.

Is this all doom and gloom? No, not really. The ad industry is still growing at a solid double-digit tick in many areas of the market. However, you need to realize that a lot of these ad companies are having a hard time staying afloat. Many of you remember how CPA Empire was accused of shaving profits from one of their customers… I honestly believe it completely, because times are tough and people will try to stay profitable.

Barron’s predicts that it won’t be until 2010 that we see ad agencies return to “business as usual.” I totally agree with this assessment, and feel that it won’t be until one year from now when you’ll start to see things rebounding and coming on strong. I believe that we have a long way to go, and the industry is about to consolidate as smaller companies are gobbled up or bankrupted by a vicious investing environment.

As an internet marketer… don’t worry too much. Keep your head on straight, and your profits won’t drop off too much, despite the flailing industry you work under. There will always be affiliate business to be exploited for cash… so stay in the game and hope for a better tomorrow. One thing: maybe you should start buying some sympathy cards for the marketers that are about to dance with unemployment.