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Quick comment on broad reach ad companies

Recently, Jeremy Liew of Lightspeed wrote a great blog called Three ways to build an online media business to $50m in revenue. In fact, it even received some coverage from the New York Times, which you can find here.

First off, let me encourage every Web 2.0 entrepreneur to read the blog for a sobering analysis. But let me state that the analysis merely shows the EXTREME endpoints, and not the typical situation.

Jeremy’s calculations basically come down to dividing $50MM against a $1 CPM, a $5 CPM, and a $20 CPM. Here’s an example:

1. Be a site with a broad reach (say general social networking, communications, news). At large scale, without a great deal of targeting possible, a startup’s “run of site” or “run of network” advertising might be able to get to the $1 RPM range (Revenue per thousand impressions, including CPM, CPC, and CPA models). To get to $50m in revenue you would need 50 billion pageviews in a year, or just over 4 billion per month. According to Comscore, Bebo had the 10th most Pageviews in the US in Janurary 1007, with 3.4bn, so you would need to be bigger than that.

Great thinking. But keep in mind that the typical site has inventory at $20, $5, and at $1 CPM, and your mix leans one way or the other depending on how contextually relevant you are. And oftentimes, the top 5% of inventory actually acounts for 40% of the revenue, because the $20 stuff is worth so much. The way this happens is that when you’re a social networking site, you still start to carve off areas that seem contextually relevent enough.

So for example, you might carve off music or games or movies or whatever, and sell those at a high CPM. Or you could even artificially limit the # of ad positions on a place like your homepage, so that it commands a premium.

I think a lot of people are mistakenly taking the calculations as saying that if you have a Web 2.0 community, you’d have to be really huge to be worth anything. I think that’s basically half true – you do have to be huge, but there are strategies to claw up into the higher CPMs.

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