The rise of social networks such as Facebook and wireless gadgets such as the iPhone has set off a small stampede of companies hoping to build on or replicate their success. Many are counting on advertising to pay the bills.
But will it work?
So asks the Washington Post's Zachary A. Goldfarb in a recent article that does a pretty great job of summing up the general feelings of our Google-dominated Internet world:
How long can this advertising party last?
Some background (which you probably already know): More and more organizations are trading in their traditional paper or brick-and-mortar existences for electronic identities. Everyone from major clothing stores to newspapers and magazines, from TV channels to government agencies are making the transition to the Internet.
And it makes sense, since more and more people turn to the Internet to do their shopping and get their news. Online newspapers can break news much more quickly online. Sellers can reach more buyers online. And so on and so forth.
But how to support this online transition? How can The New York Times or The Economist justify offering for free what they once charged for?
The simple answer: Advertising.
And as online buying, selling and info-sharing accelerates, Internet-only companies can spring up and thrive making their profit solely based on the advertising they offer on their websites.
In short, online advertising is fueling most of the Internet as we know it. Which is creating some worry that it may be about to hit critical mass: After all, how much online advertising can you even sell? How much is too much? Are there limits?
"Everyone thinks they're going to support their business with the advertising model," said Phil Bronner, a venture capitalist at Bethesda's Novak Biddle. "What people don't know about is how effective those things are."
The question becomes even more relevant when considering that web browsing itself is shifting from traditional PCs and laptops to mobile devices and cell phones.
"The challenge now is figuring out what companies are going to be the next Junipers or AOLs or whatever gets sold for $100 million," said April Young, a Comerica Bank investment banker who works on many of the local technology deals. Next year promises to be a landmark one for mobile. To many, the iPhone became the first handheld device to make Web browsing bearable. With the release of Google's Android open mobile platform and the major wireless carriers opening their networks, 2008 has the potential to transform the mobile landscape.
"For us, it's like adding jet fuel," said Jon Jackson, chief executive of Mobile Posse, a Tysons Corner company that is rolling out programs to send banner ads to cellphones. This month, the company announced it had secured $10 million in venture capital, one of the biggest venture plays in the area in 2007.
Companies such as District-based Distributive Networks, which sends text ads to cellphones, and big players such as AOL, are trying to get users to turn to their cellphones for content.
"It's going to be much easier to get really compelling content to the device," said Kevin Conroy, executive vice president for products at AOL. Then again, "There are limits to monetization," he said.
That's particularly true when it comes to video on the phone: Users are apt to hate "pre-rolls" -- short videos that play before the main content -- on a mobile device.
"It's incumbent on us to create new kinds of ad units that actually allow us to deliver an advertiser's message," he said, such as a scrolling ticker that plays during the video.
Many local venture capitalists, still mindful of the dot-com bust, are skeptical. In a recent survey by the Mid-Atlantic Venture Association, 54 percent of the investors questioned said deals are "slightly to considerably overvalued."
John Burton, co-founder and managing general partner of Updata, a Reston venture capital firm, said that's especially true for companies selling wireless services.
"The ads will be delivered through some mobile network owned by the Sprints, by the AT&Ts and the Verizons of the world, and local and smaller ones," he said. "They are notoriously expensive to market to. Embedding yourself in one of those networks is a massive undertaking."
Others point out that a recession is becoming more possible in 2008, and the ripple effects could undermine the advertising model of many Internet start-ups trying to gain ground as big national advertisers scale down their budgets.
Sure, online business has always been a notoriously fluctuating medium, in which the nature of the medium itself keeps changing. So, won't all these new situations just create more opportunities for innovative entrepreneurs, as has been the case in the past?
Hopefully ... but the fact remains, so much has been built on top of the existing model, that if the industry starts to shift away in entirely new directions -- or if consumers change their patterns abruptly -- some real damage could result.
Get more details on the state of this potential dilemma by checking out the original article here. As always, your comments are welcome.
