Digitalwall: The Web 2.0 Revolution (3) Advertising Revenue is Not Enough

The rule of the game in the media business is monopolization, yet it is impossible to monopolize the Internet.

[+] The diluted advertising revenue

In February 1999, I wrote the first article to point out that portals could not survive only on advertising revenue (, which was contrary to the mainstream opinion at that time and has been proved true for the next five years until Google created a new model). My view was based on the following formula.

I guess you will agree with me that the growth rate of the denominator in the equation "Total Pageview" is much higher than that of the numerator "Total Ads Revenue". So you should be very clear about what is total advertising revenue divided by the number of web pages worldwide.

The conclusion is that the selling unit price of online advertising will continue to fall! When buyers' advertisement budget, which is usually fixed, is allocated to web pages around the world, each page can only get a slim portion of the money. This is exactly what the Internet is – a distributed network.

The cost of online advertisement is calculated on a CPM (cost per thousand impressions) basis, which is derived from the traditional media industry standard. In fact, the figure of CPM has been declining since 1999.

When is average unit price of online advertisement worldwide keeps falling, it becomes very dubious whether a website can survive solely on advertising revenue or not - especially when each of the websites continues to produce a vast amount of web pages to dilute the advertising revenue.

[+] The rule of the game in the media industry is monopolization

Gradually, the increasingly dire conditions start to press hard upon the portals. Judging from the above equation, there are only two ways to survive. One is to snatch the limited online advertising budget of the buyers and starve the competitors:

That is why we see major players take the initiative to lower their price. The formula shows that when the selling unit price drops, the websites with fewer visits will not be able to generate sufficient revenue to support their operation. In fact since 2000, there have been quite a few similar cases in which major operators voluntarily reduced their prices, causing smaller players to exit the market.

The second tactic is to attract all online users around the world to my website so as to maximize the number of pageviews. As long as the number of total pageviews is high, even the advertisement unit price is low, the total revenue accumulated can be phenomenal as well:

Either of the two methods points out one substantial fact that, only a monopoly or oligopoly on the global Internet pageviews will likely be able to survive solely on online advertisements. Yet, is it possible to concentrate all the pageviews in one single website?

This is what the media business is like. For all traditional media from newspapers to television, only a monopoly or at least an oligopoly will have a chance to enjoy profits. However, when the cost of storage and bandwidth on the Internet keeps falling, and the number of webpages globally continues to grow in an explosive rate, it is unrealistic to talk about monopoly.

[+] Low click rate and high cost of online advertising by community services

In addition to the above mentioned conflict between the characteristic of the Internet and that of the media business, there are also quite a few problems in the aspect of operation. Traditional media start to charge for the news content borrowed by Internet media to fill in the space. Traditional newspapers are not happy about the declining circulation and revenue. They now ask the users to pay for the content and to share the cost of content production, which is after all reasonable.

Another reason for the decline of the online advertising unit price is that the CTR continues to fall. Ten years ago, there were about 50 out of 1000 visitors who would click on the advertisements; now the figure is less than one out of 1000. The effect of online advertising has been weakening, which inevitably drives buyers to bargain on the price. You can imagine what the situation has become now after these ten years.

Furthermore, the quality of the content of online community services, such as chatrooms and forums, produced by users during their interaction, as well as the volume of traffic generated, does not live up to common expectation. There are junk content or deserted forums everywhere on the Net.

On the other hand, when users concentrate on their discussions and exchanges, they will not click on the advertisements. As such, the CTR of advertisements provided by online community services is naturally low. What is worse, services characterized by user interaction normally consume more bandwidth, which would result in higher operational cost.

As regards the free personal homepage services, they were very popular at the initial phase of Internet development – GeoCity was among the first and most famous providers. Yet from 2000 on, Yahoo! started to restrict the maximum traffic allowed for personal homepages. Once the number of pageviews exceeds the cap, unless users pay for the service, additional accesses to the webpages will be denied as as way to control bandwidth cost.

[+] A rule overthrown

The high bandwidth cost which characterizes online community services was indeed a problem in the Web 1.0 era. At the end of 2004, Yahoo! announced the termination of its chatroom service for these chatrooms were flooded with porn or junk content. Insiders knew very well that this was all about closing down a costly but profitless service.

Services such as free email accounts and free online calendars all have similar difficulties. For example, there are few people who would bother to click advertisements when reading emails. Yet such services are so important that no portals dare to call them off.

Since operators can't rely on advertising revenue alone, it then becomes necessary for portals, which accommodate a huge number of services, to create income streams other than online advertising. Such a strategic imperative has gained very high priority among portals since 2001, and Yahoo!, one of the most determined, has endeavored to raise the percentage of non-advertising revenue. To this point, my prediction has come true.

By 2003, these operators had developed multiple sources of income. For those which had survived the chilling winter, it was expected that the Internet business would move on with these portals leading the way. To everyone's surprise, there came Google coming up with a brand new rule. We should not have made light of the Internet at all. (
2006/09/10 - By Digitalwall.com - Way to
China Internet/Telecom )