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Scaling the media model

Interesting post today on TechCrunch, analyzing the current "bubble" and the fate of Web 2.0 companies. I agree with most of it, including his spot on analysis of the value of the network effect. With that, it doesn't address this fact: a network, large or small, is as only as good as the monetization it delivers. And right now, absent massive scale, the online media model still isn't delivering.

The reality of the world is that if you are an online destination relying on a media model (as opposed to search, ecommerce, etc.) for monetization, absent a tremendous (and I mean tremendous) number of page views, you're not driving that much revenue. Now, if you are a blogger and only need to monetize your site for extra beer money or perhaps to quit your day job, this isn't a problem. But, if you are a VC and you've poured a bunch money into what you hope to be the next big thing, it certainly has to keep you up at night.

To get a state of the world, let's take a look at the numbers from a site that has managed to scale massively: Facebook. Fortunately, the recently leaked Yahoo!/ Facebook Project Fraternity projections provide a very candid view of the online media model from two of the top players. Now, obviously, this deal never occurred and the numbers are just projections, but they do show (a) how well Facebook was performing on its own (2005) and (b) how well Yahoo thought it could monetize the Facebook inventory post an acquisition (thereafter).

Here are their numbers:

Year Facebook Site Wide CPM
2005* $0.26
2006 $0.35
2007 $0.74
2008 $1.31
2009 $2.05
20010 $2.96

*2005 Pre-hypothetical acquisition.

So, on its own Facebook is/ was monetizing its site at $0.26 CPM. While this is low, it is also a reflection of the fact that its direct sell through is only 4% of its pages. What's more interesting is that had this deal occurred, even after Yahoo! had five years to integrate Facebook into its operations, train its talented sales force to sell a heck of a lot of new inventory, create ad products specifically designed for advertisers to reach the valuable 18-24 year old set Facebook delivers (most of which are even more valuable as they are registered users), the site wide CPM would increase to....just under $3.00?

Two more notes on these numbers:

(i) I presume that the Project Fraternity projections included the integration of a Yahoo! search box onto every Facebook page (there is no search on the site absent the acquisiton). This addition should, theoretically, yield the highest CPM's out there. I say I presume this because I would assume this integration would be a flip of a switch that would occur on day one, but for some reason the CPM from 2005 (pre-hypothetical acquistion) to 2006 (post-hypothetical acquisiton) only jumps $.09; and

(ii) my guess is these numbers are aggressive. Remember, they were being used to justify a $1.6b purchase price for a company with less than $8mm in revenue.

In any event, back to point. So, what do these numbers mean if you are Yahoo! or Facebook? Not much. Individually, they're each delivering such a massive number of monthly page views, that low CPM's don't really matter. The can still deliver a meaningful amount of revenue.

But what if you are an otherwise run of the mill, general interest Web 2.0 company trying to manage a media business model? Well, these numbers tell me that, under current conditions, you better figure out how to grab an audience where you can deliver a billion plus monthly page views if you want to earn real money.


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