No doubt the advent of internet services such as Google, Facebook, and Twitter have changed the way many of us communicate and view the world. While these services are deemed to “revolutionize” business, I don’t understand the hype in business fundamentals, since the financials underlying their business models, in themselves, haven’t changed much from traditional channels of marketing communications from a generation or two ago.
The goal of internet companies is, more or less, to pull Madison Avenue ad dollars from more traditional forms of print, radio and television media and direct these dollars to digital. That’s it. Oh sure, there are different ways to measure, or count, how much an advertiser has to pay these services for mediating their messaging, but so was the case when radio and television was invented and syphoned from print advertising revenue. New media, old model.
Yet, big advertisers only spend so much money a year in advertising, roughly $560 billion according to Zenith Optimedia. Digital can, and will, continue to pull these dollars away from big ticket broadcast television advertising, but it’s a zero-sum gain, as there are only so many ad dollars out there. The result? Trouble. Online ad spending is growing at an increasingly normative pace (about $130 billion now), with services such as Google and Facebook enticing fewer and fewer new users. i.e., like ad dollars, there are only so many people. At the same time, these brands’ market valuations continue to soar.
Don’t get me wrong, I’m all for soaring market values of firms that earn them, but the time is fast approaching for these digital behemoths to find a new set of business fundamentals on which to evaluate their revenue trajectory and subsequent future financial health. Agency media planners can send only so many ad dollars their way. They already sent Google half of this year’s online ad spend. Then what? Will they then develop a subscriber-based model such as Netflix, or will I pay to use Google or Facebook as I do for wireless at home? Will they become utilities like electricity and water? If so, still only a limited subscriber base, and hence valuations akin to your grandfather’s utility stocks, this is a diet these companies are not use to. This, or whatever else emerges, will take time; does Wall Street have the patience?