Cascadia Capital

Warren Gouk

Despite the dire financial news, deteriorating business fundamentals and negative conventional wisdom, online advertising and activity are holding up well in the face of today’s economic adversity.

But this won’t necessarily be the case in 2009, when a supply and demand imbalance will compress online advertising rates, force significant change on the digital community, and hopefully turn investors in the Internet new media world toward innovative revenue-enhancing technologies.

On the current face of it, you wouldn’t know that a potentially destructive storm is brewing out there for online publishers.

In fact, there’s a lot of active engagement across digital communities right now – and it’s being pretty well monetized through advertising, branding and commerce.

One of the reasons for this calm before the storm, however, is that fourth quarter advertising budgets were set a long time ago – well before the present economic turmoil unleashed itself. But ad budgets are a lagging indicator, because now that we’re confronting truly tough times, projected outlays for 2009 are contracting – in some instances quite dramatically.

Unfortunately for Web publishers, the growing supply of online advertising is outpacing the demand, which will likely contribute to building inventory levels and slumping ad rates throughout 2009. It’s too early to trot out the numbers as proof of this expected slide.

But you can see where this is headed – at least directionally.

Indeed, the online CPM a few years ago was anywhere from $1-$3. Last year, it was between $5-$10. And next year, I expect it to be south of $5.

We are beginning to see a sea change from quantity to quality as advertisers demand stronger connections with their audience through better targeting technologies.

The only way for online publishers to hang in there and withstand the ratcheting down of the economy is by delivering solid, trusted and measurable results that people can depend on. Otherwise, the Internet new media business is going to be hit hard as the market erodes in coming months.

Despite the gloom, a little bit of perspective is needed – and is in order.

You can rest assured that 2009 will not be 2000 all over again.

Back then, you had extreme skepticism about whether online advertising even worked. We now know that it’s effective, so I don’t expect that kind of free fall this time – although it will be a tough slog for many players.

So what can online marketers do to offset the compression in ad rates? First, they can add rich features and enhanced value so their business model isn’t totally dependent on advertising revenues. And second, they can harness and optimize new technologies that help make their current audience more valuable.

That means developing and deploying a host of innovative conversion tools like behavior analytics, segmentation and targeting solutions; it also means finding effective ways to tap into sub-communities that reside inside master communities.

Online publishers who adopt these new cutting-edge conversion strategies stand a good fighting chance against the coming economic tornado; and investors who back the companies that are bringing these fresh technologies to market stand to profit in a major way – even amid financial uncertainty.

The bottom line is that winds of distress and dislocation will blow hard over the next year or so, and this will surely rattle the online marketing business; but in the end, I believe the heavy weather will fail to bring down this newly mature industry – thanks to resourceful entrepreneurs and executives as well as smart next-generation technology.

Warren Gouk is a Managing Director at Seattle-based Cascadia Capital, a national investment banking firm. Guest posts are the opinions of their authors, and don't necessarily represent the viewpoints of TechFlash or its staff.