Ask the VC: Ad Revenue Models

One of the readers at Ask the VC posted the following question and I did a guest post on it for Brad and Seth:

Question: (1) How do Web 2.0 companies like Feedburner make money?  (2)
What makes a blogger or content provider select one network or blog
community over another (i.e., are the bloggers themselves being paid or
are they essentially working for free)?  (3) How is online media
advertising different now than during the internet boom?

The most popular Web 2.0 revenue model is based on advertising. There are three key players in the ecosystem: Publishers (owners of the sites like blogs, media sites, etc), Ad Networks (aggregate advertiser on behalf of the Publishers) and the Advertisers themselves. Publishers get paid by advertisers who advertise on their site. FeedBurner is an ad network and while it made some money off of licensing its platform to large publishers, most revenue came from the ads inserted into the feeds. This ad inventory comes from either the company’s own direct ad sales force or from ad networks. Some of the ads are CPM based (impressions viewed) while others are CPC ($ per click…a la Google). The publisher generally keeps 60-70% of the ad dollars and the ad network gets 30-40%. So, if Motorola runs an ad campaign through an ad network like FeedBurner, they might pay $5-10/CPM (cost per thousand impressions). The ad network then takes that ad and serves it up on the various websites it has deals with. If the ads are viewed 1,000,000 times, Motorola would pay the network $5-10,000. The network would keep $2-4,000 and the publishers would get the rest. In the case of bloggers, they first pick which ad networks to go with (usually based on which drive the most revenue for the space given) and then approve different ad campaigns. They get a cut of those ad dollars.

More advertisers understand the benefit of online advertising and so, there are more ad dollars flowing into this space than during the Bubble. More importantly, Google has created an entire ecosystem based upon its CPC model where advertisers only pay when ads are clicked on. They feel there is more accountability since they only pay when an action is taken. Also, there is very little cost associated with running many of these publisher sites, so it doesn’t take much to get to break even.

That said, the economy is likely sliding into recession and ad budgets will get slashed. CPC and CPA (cost per action) based revenue should hold up better than CPM based ones since there is a clearer ROI. In  2000, Yahoo saw its revenue plunge 40% in one year. When the cycle corrects, there will be quite a lot of carnage in the ad supported publisher world. Smart operators will get their costs inline and focus on driving the best possible results for advertisers.