Follow What Money Where?

There is no getting around it. This column’s moniker begs for a snarky retort in these dark times, so I may as well beat you to the punch line. By the time you read this, I expect that more than a few startups that made a big splash last year will be running out of cash, fading away, and/or selling out cheap. While the true direction of the online ad market remains unclear in early 2009 as I write this, the direction of venture funding is unmistakable: down.

There are select deals going on, generally for single-digit millions rather than the double digits we saw last year. Most of the companies I know that are drawing serious cash have already established key relationships with a client base and have known quantities in the CEO chairs. Investors are looking past this cycle into inevitable trends. I have seen venture money go into mobile video infrastructure, local online ad sales firms, and data mining marketing plays because long-term momentum is going their way, regardless of the length and depth of this recession.

On the ad side, an executive at one of the more successful business pubs online,, says that a 10% display ad drop in 2009 would constitute a "good" year in this environment. Most of the publishers in the B2B content sector with whom I speak admit pretty frankly that it is very ugly out there. Nevertheless, especially in niche industries, companies still have to advertise. Money is coming from the usual sources—industry vendors. The difference may be that the money will flow to fewer outlets. Several publishers in the auto, electronics, and finance segments tell me they expect attrition to consolidate their markets, producing opportunities to recapture lost revenue from competitive titles that are already folding. CPMs are depressed as brands sharpen their banner strategy toward highly vertical sites and performance advertising with measurable ROI. The problem for publishers is that even targeting is not keeping some prices elevated. One major media buyer told me his group is demanding and getting behaviorally targeted inventory at run-of-site prices.

As I said, on the M&A and VC side some money continues to flow. Investment analysts seem to agree that major publishers will continue to look for strategic deals to expand their portfolios of titles without needing to assemble funding. Interestingly, business publications continue to get more respect and attention than consumer media. AdMedia Partners recently surveyed 1,500 media executives about the prospects for M&A activity in their segments, and 17% felt that the professional publishing market could be strong while 39% felt it would be moderate. That may not seem so rosy, but compare it to the 64% of respondents who felt consumer magazine activity would be weak. For B2B pubs, only 5% anticipated a strong market, but 43% felt it would be moderate. The highest confidence overall appears to lie in data, information, and database publishers, where 52% of those surveyed felt investment prospects were moderate. Whatever the outcome of this recession, data (its generation, aggregation, and manipulation) will rule media. Still, more than half (51%) believe that even strategic buys will decline.

Wherever the money ultimately flows, I think this downturn has exposed some of the persistent frustrations with online businesses as well as some underlying faith. For instance, AdMedia asked this same crew of media mavens where they thought growth opportunities were overrated and underrated in the market. On the overrated scale, social media networks (71%), user-generated content (51%), and ad networks (41%) piqued the most skepticism. Confidence remains high in search, with 58% saying the category is fairly rated for growth. However, media executives are quite sanguine about niche and enthusiast content, which only 14% regard as overrated, 44% think is fairly rated, and a surprising 28% cite as underrated. Without saying so explicitly, these media executives are indicating that the massive digital content phenomena of the past few years that attracted scale are not necessarily the ones that will successfully leverage that tonnage into sustainable businesses.

Girth, mass, and raw undifferentiated crowds are not the future of the internet. No amount of tech-driven segmentation will make social networks and UGC (or even massive ad networks) feel like quality environments that will attract the kinds of fees that support publishers. For that, you need editors, content, design, and reader relationships that reflect the visitors’ own passion. Aim for the niches.