I found this little nugget in an article written by Owen Thomas over at Valleywag.
It seems that LiveJournal might be going the way of the carrier pigeon. Their parent company, Sup, a Moscow-based company, has laid off 20 of LJ’s 28 employees with no warning or severance and blamed it all on a “downturn in the economy”.
The article goes on to talk about other social networking sites that may be going out of business in the near future, but I’d like to take a look at a larger concept.
How do websites justify the ridiculous amounts of money that they “earn”?
Advertising? Seriously, do you know anyone who has ever clicked an ad banner? I have a hard time finding someone who doesn’t have ad blocking software integrated with their browser. I don’t blame web companies for cashing in on this phenomenon. If someone offered me a million bucks per year to put ads all over my website, I’d do it too. What I’m wondering is why companies pay incredible sums of money to advertise on the web or on TV. Ad revenue is the driving force behind things like
- The Tostito’s Fiesta Bowl (ok, EVERY bowl game)
- The BCS in general
- 2.6 million dollars for a 30-second ad during the Super Bowl
- News Corp. (Fox) paying 580 million dollars for Myspace
- Stadium Naming Rights
I understand advertising. I understand the business need to get your name out to the public in order to increase interest in your product. However, the dollar amounts here are far beyond the point of getting any kind of reasonable return on investment.
Citigroup paid 400 million dollars for naming rights at the New York Mets’ new stadium. Wait a minute. Do you mean the same Citigroup that recently took billions of dollars in bailout money from the Federal government? The same folks who are begging for dollars from Uncle Sugar are spending 400 million bucks to name a baseball stadium? (the same baseball stadium that was paid for by taxpayer dollars?) The same Citigroup that paid millions to have their name attached to the annual Rose Bowl game?
I have a special message for all of you Madison Avenue types out there. We don’t watch 99% of the commercials that you throw out there. Thanks to the two greatest inventions of all time, the TiVO and the remote control, we either fast forward through commercials when we are watching a recorded show, or flip channels to something else while commercials are running on live TV. You’re paying millions of dollars for ad time that viewers spend going to the restroom, making a sandwich, walking the dog, changing the channel, or outright fast-forwarding past. Web advertisers? If your ad is seen by a million users (and that is a seriously optimistic case, given ad blocking software), let’s say that you get a click-through rate of 1% (according to this article, the actual click-through rate was 0.5% back in 1998) That leaves us with 10,000 people who clicked your ad. Of that, let’s say that 10% of those users actually buy your widget. (The number in the article is 12%) That’s 1,000 sales or a 0.1% rate of success for your advertising.
So, using that number as our basis, let’s look at a Super Bowl ad. Last year, the Super Bowl was viewed by a record audience of 97.5 million people. If we use the figure of 3 million dollars for airtime and tack on another couple of million for other costs (actors, filming, ad exec salary, etc) we have a nice round figure of 5 million dollars. 0.1% of 97.5 million is 97,500 people who purchased your good or service because of your Super Bowl ad. Let’s round that up to an even 100,000 people. 5 million dollars for 100,000 sales comes out to 50 bucks per “widget”. Do you know anyone who would pay 50 bucks for a case of Budweiser? Pepsi? Tostitos? Pizza Hut?
If I were an advertiser, I would focus my efforts on being “easy-to-find”. I’d make focus on an online presence and make sure that if someone searched the web for “widgets” that my company would be one of the first one’s found. To that end, I can understand how Google makes a ton of money. Search engines are ideal for advertising because people are looking for you. Paying a ton of money to expose your company to an indifferent (at best) audience is not a good investment.
Oh, and for the record, I still have no freakin’ clue what insight.com is or why they have their own bowl game, and I have absolutely no desire to find out.
