Posted by Tom Foremski - April 4, 2011
Here's an interesting analysis of the advertising industry and Silicon Valley's growing bubble in new media by Rick Webb.
He argues that Silicon Valley is heading for a cliff in funding too many startups to provide new media channels for advertisers.
He writes that there seems to be a perception that there will be far more money in online advertising than there really is.
Brands don't actually want or need any more media channels. As far as they're concerned, the internet can stop now. We have enough channels. We were happy when we had like seven (TV, print, outdoor, radio, in-store, direct and theater), got a little interested in the first few new ones. Urinals? Uh, okay. Banners? Interesting. Google? Yes. Groupon, Farmville, GroupMe? OKAY I AM GETTING TIRED NOW. Silicon Valley seems to think that advertising's appetite for new media channels is unending.
...every time I talk to a Valley person about this they go on about how marketers want more data and they'll pay for it, and they want to know everything about a person and oh man do you know how much advertisers would pay for this data? Well, yes, I do. But I guarantee you, YOU DO NOT KNOW. They have fixed budgets. I could tell you EXACTLY how much they will spend, because I spend that money. It is not bottomless.
So how much money is there out there to spend on media?
Mr Webb estimates that in the US there is about $200 billion a year spent an all forms of advertising. Worldwide it is about $450 billion.
But even if ALL of the world's advertising money went online that is still not enough to justify the hopes of Silicon Valley companies.
Hey internet, take every penny spent on advertising in the whole, wide world. $450 billion. You already have just over $100 billion of it. You only get 350% more growth. At all. Ever. Google's revenue? Let's call it $36 billion. YOU ONLY GET NINE MORE GOOGLES. Worldwide.
He makes a fair point, also pointing out that as advertising budgets move online they become smaller -- there's less money available.
However, this won't discourage investors. Silicon Valley ALWAYS over-funds a sector. It never adds up the market numbers, divides by the number startups, then makes a rational decision to stop further investments.
Things don't work that way because it's a race with winners taking all, not some kind of collective where monies are divvied up equally among the startups.
Mr Webb's analysis is interesting but his conclusion is ultimately trivial:
The worldwide ad spend is not enough to fund a hundredth of the companies that are being funded to pursue it.
So what? The losers are part of the process -- one that has served Silicon Valley very well.