The long and inevitable decline of internet advertising

Google has been spending $10 in investor money for every $1 in advertising revenue.

Funding for ‘free’ internet infrastructures cannot rely on advertising. Here are some crucial data.

Steve Arnold:

“TEM: The disturbing decline in Google’s online advertising efficiency. Let’s look at this point because it weaves together a number of soft nudges into a big shock to investors and advertisers.

The Atlantic Wire (a publication which tells me “what matters now”) summarized the situation clearly. (You can find “The Decline of Google (and the Internet’s) Ad Business” online as I write this.)

Here’s the passage I noted:

During yesterday’s (July 19, 2012) earning call, Google reported a 16 percent decline in CPC, meaning the value of each advertisement clicked has gone down. That follows a 12 percent drop last quarter and 8 percent the quarter before that. Even at the company that managed to make money off of Internet advertising, those online ads are continually losing value.

What strike me as more important than the magnitude of the decline, which certainly seems to be increasing with each passing quarter, is Google’s cost problems. Google has done a very good job of fuzzifying how much money it takes to keep its brute force system up and running. Google’s financial reports are clear; for example, for the 12 months ending December 31, 2011, the total operating expense was $26.2 billion. Clear enough. Here’s the series which I find interesting:

December 31, 2009, $15.3 billion

December 31, 2010, $18.9 billion. (Up $3 billion from 2009)

December 31, 2011, $26.2 billion. (Up $7.2 billion from 2010)

Google has been cruising on the assumption that online advertising revenue was darned close to limitless. Here’s what the Atlantic Wire offered:

In the scheme of the Internet, Google’s loss shows an unfortunate reality of online advertising. Unlike the print world, Internet ads lose value over time. As Technology Review’s Michael Wolff bluntly put it: “The nature of people’s behavior on the Web and of how they interact with advertising, as well as the character of those ads themselves and their inability to command attention, has meant a marked decline in advertising’s impact,” he writes. Google eluded online advertising woes by making itself a necessary middle man, via Ad-words, Wolff continues. And it did this early, which also helped, explains SmartMoney’s Jack Hough. But even that hasn’t stopped the core inevitability that online advertising is a race to a bottom, as we’ve seen these last three quarters. Google has blamed this on mobile, only further proving the ever-declining value of an Internet ad. “People have long described the price difference between print and Web ads as moving from analog dollars to digital dimes,” explains The New York Times‘s Claire Cain Miller. “Cell phone ads could be described as trading those dimes for mobile pennies. Clicks on mobile ads cost about 40 percent of the price of desktop ads, according to Stifel Nicolaus,” she continues. And, unfortunately for the ad-sales biz, the stats show mobile use is on the rise.

Now the killer statement:

This isn’t just a Google problem. Overall Internet advertising has decreased in value over the years. It’s a pattern TechCrunch’s Erik Schoenfeld noted back in 2009 with the other Internet big guys, Microsoft, Yahoo, and AOL all seeing ad revenue decline. Wolff confirms it anecdotally. “I don’t know anyone in the ad-­supported Web business who isn’t engaged in a relentless, demoralizing, no-exit operation to realign costs with falling per-user revenues, or who isn’t manically inflating traffic to compensate for ever-lower per-user value,” he writes. It’s also a problem Facebook has faced since going public. Its promise, in fact, lies in proving it is anything but a standard ad-sales company — because on the Internet, an ad sale isn’t a promising business proposition.”

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