The Irrational Exuberance of Web 2.0? Advertising.

In the bubble that is now deflating, there was both rational and irrational exuberance.

Exuberance related to the social web was rational. If you don't believe
it, go to Washington on Jan. 20. Our new tools to connect are changing
the way we live.

Advertising-related exuberance was irrational. Far too many companies
were launched with unrealistic assumptions about the size of the online
advertising market. (I was certainly an offending party.) New ad
networks like AdSense made it possible to think of revenue as a
constant that you plug into your product after it generates traffic.

Now two problems with that approach are clear:

1. The advertising market became oversupplied. Lots of new social
networks and tools were selling undifferentiated inventory, so
advertisers were able to drive the price of that inventory down.

2. Demand for advertising decreased. As inventory available to advertisers increased,
its effectiveness as a marketing channel decreased. When media
consumers were captive audiences, advertising worked. Now that
consumers have choices, it's less effective. It's mostly irrelevant, or
an interruption.

You can see these dynamics at work on both Facebook and YouTube.
Facebook is still struggling to find an advertising revenue model that
. It has an enormous supply of ads, but can't charge much for them
because consumers ignore them. Online video sites like YouTube have a similar problem.

There are wonderfully stupid things being done to try to solve these problems — and wonderfully smart things — but nothing will fully reverse the declining effectiveness of online advertising. It will persist in more relevant, targeted
formats (I don't agree that it is "now dead"), but it is fading
from the center of the online marketing world.

As Dave Winer puts it,
advertising is just information, and there are now far more efficient ways to collect information.

Photo: tylerc on flickr


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