Monday, August 6, 2007

Thar' She Blows?

I'm surely not the first - nor will I be the last - to point out that Silicon Valley seems to be heading back into bubble territory. Just take a moment to look at the number of social networking plays - and their associated exorbitant valuations - that are out there right now, how many video sharing services have sprung up following the YouTube Google exit, and now even the recent ramp-up in studios producing new content that will supposedly drive traffic volumes and create new, stickier sites. In each case, advertising revenues are somehow supposed to be shouldering the burden, often in ways yet to be specified, of either turning a profit or helping to lubricate an exit. And you know what? I just don't buy it anymore.

In terms of my own web usage, Google is the only advertising-driven tool I actively use. I can't remember the last time I clicked on an advertisement I found on any other web site, and I suspect I am not alone in this. Such behaviour, if indeed common, then begs the question, have web-surfers already tuned-out the noise of on-line advertising?

Fairly enough, you could argue that advertisers have for decades spent money on promotions where they have little or no clue as to how effective their efforts really were, and yet they kept spending so little has changed, right? Wrong. The reason for piling onto the web is exactly that it does allow them to close that loop between advertising campaigns and results, creating a true feedback mechanism in the process. Return on advertising dollars, via the tracking of a metric such as click-throughs, on-line purchasing, referrals etc. should be no more than a dashboard away from the advertising managers grasp. Finally, a way to judge advertising effectiveness that works reliably and repeatably, and a chance to concentrate spending where it does the most good.

If this scenario does indeed play out then surely the net effect will be a draining of money from the outlying web properties in any given market in order to enable the concentration of funds towards the main players where the profitable traffic is being found. Indeed, that's already a big part of why the name brands in cyberspace are worth so much. Until now, advertisers have been happy to hedge their bets, spreading the money around in the hope of spreading risk. However, once these new web-based models unequivocably give no hiding place for what dollars are being spent effectively and which ones wasted, what choice will they then have but to spend more wisely and in fewer places?

Here though is the big disconnect: many Valley VC firms are betting that the other properties in the same space will continue to benefit by association, surviving in the long run under the "rising tides float all boats" principle. This is exactly where I think the logic is flawed, revealing to us the pin that may ultimately burst the web 2.0 bubble. (Bubbles, blowing, whales? Yeah, pic choice was tenuous to say the least. Guilty as charged.)

Google will continue to grow; advertising revenues will continue to move from traditional channels onto the web; but not all web destinations are created equal and in the medium term only the real king-pins in any given vertical will survive and prosper. Anyone thinking that the fifth-ranked, copycat video sharing service is, therefore, going to attract a nine-figure exit is likely to be sorely disappointed. Ditto some social networking site dedicated to DIY dentistry or self-trepanation: yup, you know the drill ....

Sigh. It just seems depressing that a no-name, no-hope social networking site can have VCs fawning all over their business plan, clambering over themselves to stuff $1,000 bills into the clothing of the 25 year old entrepreneurs pitching it, while other companies with real products and innovative technology find the going so tough as to struggle to even get an audience.

No one ever said, though, that Silicon Valley was fair, but just once it would be heart-warming if the needle would swing slightly in that direction.

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