The end of the Web 2.0 advertising myth

From @bmorrissey

For a long time, I was reminded of The Graduate whenever I met with an eager, undeniably smart and ambitious Silicon Valley founder. After he explained the consumer value the Web 2.0 service created, I’d ask the business model question. Instead of whispering “plastics,” it was “advertising.”

This unflinching belief in advertising as the catchall monetization tool came out of the strange Valley culture, which I’ve found just as inward-focused as the more-maligned East Coast media industry. The VCs, analysts and entrepreneurs all bought into this idea that if you build a large enough audience, you have a media business. Not quite. On one level, I understood this line of thought. Unless you have scale, you don’t have a business anyway, so focus on scale. But it led to a nearly comical belief that the process of actually making money was quite easy, like turning on a spigot. Dave Karnstadt, the Efficient Frontier CEO, spent six months as an executive in residence at Redpoint Ventures. He told me a disturbing number of companies he met with pointed to AdSense as their revenue model. What many companies are finding is even if they build to what they find what they think is scale, it’s not enough.

This is the great unraveling of this Web 2.0 advertising myth. As Wenda Harris Millard said, “There’s not enough advertising to go around.” The Times has a story about how iMeem and other music services have recognized the economics of ad-supported music aren’t there. News Corp's Jon Miller had some interesting things to say at All Things D about how even a behemoth like MySpace needs to diversify its revenues. On a much smaller scale, Om Malik rolled out a subscription service for his GigaOm network of content sites.

Like other unravellings (not a word), this is going to get messy. This is the year these venture-backed startups will have to figure out their business models, and it couldn’t come at a worse time. Web 2.0 companies will come to realize that building a media business is hard work, not just matter of amassing millions of eyeballs. Many services built are communications platforms that don’t perform well on a direct response basis. That means relying on scarce brand dollars. And the process of selling brand advertising is painful and requires a totally different skill set and culture than these tech companies possess. The upside is the next generation of startups will most likely focus on their business models earlier – and be a little more creative than using advertising as a cure-all.