More monetization thoughts

Last week, I started to write about a recent report that stated that only 10% of a publisher's inventory is directly sold, the rest being left to the mercies of ad networks. While recent efforts to optimize placements within ad networks will likely continue to enjoy incremental eCPM rates for many publishers, its not going to be enough to change the fact that display ad revenue alone cannot make a content company into a real, profitable business.

Late last year, I wrote:

If you are an online web property with aspirations to grow into a large, profitable business, you have some serious challenges to overcome.

If you are a content-centric company, your revenue growth increases linearly with your audience growth but so does your cost structure. So the more money you make, the more money you lose. What major stand alone content-centric site or online magazine is actually a viable business today? (There may be some, please point them out)

For social networks, the problem is more difficult. Like content companies, your revenue growth is also linear to audience growth but your cost structure may be exponential. I hear that Facebook has significant cost issues see (http://www.techcrunch.com/2008/10/31/facebooks-growing-problem/). They have a plan to buy an additional 50,000 servers - is revenue growing at the same y-axis rate? Um, not even close.

What does this mean for online companies? There needs to be some variable on the revenue side that makes an exponential difference to get to profitability. A significant jump in average CPM for a site's entire inventory (not just small discrete campaigns) is the most obvious. Can you get from sub-$2 eCPM to $10 or $20? The market is not big enough yet for the numbers to add up for that to happen quickly (online ad spending is not going to jump 400% overnight). The horrible economy may actually help some in that the very best sites could see significant jumps as they focus more faithfully in wooing advertising dollars while keeping their cost growth more in check.

Another revenue side option is to find non-advertising monetization techniques...I have thoughts on that to share in another note.

One can also hope for technology innovation to find exponential savings on the infrastructure side of things but it seems that user consumption is staying ahead of any significant bandwidth or storage savings that technology has provided.

The stat that only 10% of a publisher's entire inventory yields premium eCPM's underscores this whole point. You can't rely on ad dollars alone to build a business. The 10% number faces downward pressure as the growth of publishers exceeds that of ad spend growth (I think). Although this revenue should represent one of the strongest revenue streams for the publisher, it can't be the only one. I think there is a big opportunity for products that help online publishers monetize their audiences in other ways.