Get the newsletter · 2018 essays (PDF) · Featured · Recent

Inventory glut in social media

Worth reading for any internet ad junkie: Yahoo! Q3 2006 Earnings Call Transcript.

I will talk about the inventory glut. It has definitely been a huge change. You can see from the page views of a lot of the social media sites that exist today. That is going to change the market dynamics. What we hope is that it is going to bring in whole new categories of advertisers who have been focused mostly on the search side to be able to bring them to the other side of the kinds of advertising that is capable.

An interesting point is what a "glut" really means, in this case. Obviously it has to do with supply of ad inventory outpacing demand, but what kind of supply and what kind of demand? Well, according to Yahoo’s COO, the glut is being caused by the pageviews generated by social media sites.

But let’s dig into this deeper: As far as direct response goes, there’s no such thing as too much supply. For most direct response companies out there, they can precisely calculate the amount of money that is earned when a user visits their site and performs an action. Then they do the math to calculate, backwards, how much they can spend on an ad, in order to break even. As long as they satisfy that minimum, advertisers will spend as much money as they can get their hands on.

So ultimately, a glut implies one of the following scenarios:

  1. Either, they don’t know how to efficiently monetize remnant inventory well, using direct response techniques…
  2. … Or, they have so much inventory they can’t get brand advertisers to absorb it all.

In scenario #1, that means Yahoo has a clear weakness in technology, manifesting itself as an inability to squeeze money from social media sites. Otherwise, if every Flickr pageview could monetize like a Search pageview, they wouldn’t call it a glut – they would describe it as a huge opportunity. Obviously this doesn’t bode well for a company that spent 1/3 of their Analyst Day this year focused on how to incorporate social software into search and a bunch of other products. It could be that Yahoo is helping create a huge number of low-value impressions that they don’t know how to monetize.

As an aside, this problem of monetizing context-less inventory is a really big opportunity for advertising companies out there. Outside of the 5% of so of our day that’s spent on search, the rest of those pageviews go to random internet browsing, communications media like e-mail, IM, etc., and other low-context activities. Obviously, any company that’s able to figure out how to bring context into those areas, and help "irrigate" the Contextual Desert has a huge opportunity ahead of them. (I happen to work at a company which does such a thing, which is nice!)

The other scenario is just as dangerous for Yahoo. In scenario #2, Yahoo could be unable to sell brand advertising on their social media websites. As I’ve discussed before, advertisers like to buy brand media from properties that have, well, brand! And what is brand? It’s about trust, transparency, and consumers’ emotional connection with products and companies. For Yahoo to experience an oversupply of inventory there means that they aren’t effective in convincing advertisers to trust their properties enough to soak up all those ad impressions. This means that until these trust issues are resolved, it may be that the social websites they have will NEVER be monetizable at high CPMs (over $5), but instead must focus on sub-$1 stuff. Obviously, this is another huge worry for a company who is betting so much of their future on social web applications.

Ultimately though, this really should sound a LOUD warning for Web 2.0 entrepreneurs that are building social sites. Please keep in mind that:

  1. Do NOT assume you can attract eyeballs and the monetization strategy will just come together
  2. Do NOT assume that MySpace’s $900MM ad deal or YouTube’s $1.6B acquisition means there is strong underlying revenue
  3. And finally, do NOT assume that every pageview is equal, and that you can perform "chinese math" to calculate ad revenues

Ultimately, every startup out there must be very methodical in how they approach the overall market. Do you have a brand-oriented strategy, or a direct-response one? And once you pick, you have to align your personnel, resources, and product to capture dollars in each specific advertising market. If you ignore all of this, you will end up with a 1999 bubble company with eyeballs and no revenue – while this might work out for the defensive or disruptive acquisitions, you certainly will remove a lot of potential suitors of your company.

PS. Get new updates/analysis on tech and startups

I write a high-quality, weekly newsletter covering what's happening in Silicon Valley, focused on startups, marketing, and mobile.