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Here's why the fall in print advertising and the growth in online advertising isn't a zero sum game
November 2010.
If you check out Mary Meeker's latest Web 2.0 presentation you will stumble across this chart on slide 16.
| Year | Global ad Revenues | ARPU | Global Users |
| 1995 | $55 Million | $9 | 6 Million |
| 2010 | $54 Billion | $46 | 1.2 Billion |
This means over the past 15 years the web audience has grown by a factor of 200 while ARPU has grown by a factor of 5. These figures - just like the long-term growth in online advertising - look very healthy for the online economy until you widen the parameters of the data you chose to include in the table.
The problem is the table is incomplete. We need to add in the growth in web sites and its effect on the average revenue being earned by each web site to tell the whole story.
| Year | Global ad Revenues | ARPU | Global Users | Web Sites | ARPWS |
| 1995 | $55 Million | $9 | 6 Million | 20,000* | $2,750 |
| 2010 | $54 Billion | $46 | 1.2 Billion | 234,000,000# | $230 |
Sources:
The web audience may grown by a factor of 200 but the number of web sites has grown by a factor of 11,700. Put another way the ratio has shrunk from 300 users per web site in 1995 to 5 users per web site in 2009.
What this table suggests is the long-term trend on the internet is just that. The average revenue per web site has fallen to just 8% of the 1995 ARPWS figure. Put another way the value of the market has collapsed by 92%.
The next question to be asked is how long before the market forces converge to drive the value of the market to free (i.e. $0.00)?
Now if we factor in the amount that Google extracts from the market we discover that the ARPWS is actually only $131. Start taking out Facebook and the other Top 10 sites and the figure becomes even smaller. Go further down the long tail past the Top 100, Top 1000, Top 10,000 and it doesn't take long before you hit the magic MobCon number of $0.00.
The next question is just how many web sites the online advertising economy can support based on the current online ad spend?
Let's begin our calculations by establishing a break even industry benchmark. We could use Matt Shanahan's estimate of $10.00 per unique.
"The $6.35 ARPU for breakeven is below the $10 benchmark that we typically see for most media groups." - Fairfax Media is Maximizing their ARPU Equation
The problem is it is very difficult to include this metric into a workable equation based on Meeker's raw data.�So we'll utilise Jeremy Liew's estimates from his 2007 presentation 3 Ways to build an online media model to $50 Million in which he suggested break even for an online media start-up was $2.8 Million per year. Note the advantage of using this metric is it includes the cost of revenue (i.e. The ad aggregators share of the revenues).
Divide $54 Billion by $2.8 Million per web site and you have a figure of 19,285 web sites. At the moment there are over 234 Million Web Sites scattered around the globe.
This means the web has to shrink to about 0.01% of its current size just to break even. Or, put another way it has to shrink back to the size it was in 1995.
Even if you include the remaining "off-line" newspaper and magazine print revenues into the mix the web could still only support around 60,000 web sites. Taking this idea a step further we could utilise the whole advertising industry spend to define the potential upper limit of online growth. Prior to the GFC the total US Ad spend in 2007 was $280 Billion. That figure could still only support an estimated 100,000 web sites. That's about the size of the web Circa 1996.
At the moment a Top 100,000 web site would have around maybe 50,000 monthly uniques. This means they would need to extract an ARPU of $4.66 to break even on the $2.8 Million bench mark. The average media site averages about 8.75 pages per month per unique. To make this equation work a Top 100,000 site would need a CPM rate of over $500. Compare that to the wholesale CPM benchmark "bucket" rate of only $0.50 and you'll see just how difficult it is to break even on the long tail of the web. To achieve $500 per page you would need 1000 ads on-screen on each page. Even at the premium end of the market you would need 10 ads per page - which you are not going to achieve when the advertiser has 234 Million other web sites to choose from.
The US online advertising market is recognised as the most mature online publishing market in the world today so let's take a look at what happens when we apply this economic model to the US market.
If you subtract Google out of the US web advertising economy we discover that the value of the market in 2009 was just over $14 Billion. Apply Jeremy Liew's operational cost metric for online media (i.e. $2.8 Million per web site) and you end up with a figure of around 5150 web sites.
Now consider this: There was 20,590 Magazines and 2098 Newspapers published in the US in 2008-09. So this suggests the web economy is only big enough to support just over 20% of the existing print industry.
But what about the Print and Web economies combined? Just how many web sites could they support? Well, interestingly enough, if you combine the US advertising revenues from all of the print sectors (News, Magazines and Directories) with the US online advertising spend minus Google's share we discover the combined economy can support - guess what - the existing number of US Newspapers and Magazines.
So is this simply a magic number - a statistical correlation based on the chance meeting of random data sets - or does print advertising and online advertising represent a "zero sum game"?
Let's find out.
the next slide in the Meeker presentation compares Media Time Spent vs. Ad Spend between on-line and offline media in the USA. This slide was an essential part of her forecast for online advertising to become a $58 Billion industry.
The slide illustrates how although Print has only 12% of the face time it has 26% of the advertising spend while Online 28% of the face time but only 13% of the Ad Spend. The slide is designed to provide evidence of the growth potential for online advertising as more and more paper based publishing moves online.
The "unlimited" growth potential of the web has always been tied to the web's ability to disrupted the established print media industry.
This simple idea has launched millions if not hundred's of millions of web sites and internet start-ups over the past 15 years and that's why I though it would be worth mapping the growth in advertising revenues across both sectors - and against the other major US advertising sectors (i.e TV and Radio) - to see just how successful the web has been in disrupting and capturing the advertising revenues of the paper based publishers.
The chart below shows us that since the birth of the web in 1995 advertising revenues across the paper Print sector has fallen by 16%. However if you include ePrint into the Print advertising mix then the sector has grown by 22%.
By 2009 online advertising represented 32% of the sector's revenues and more importantly 173% of the sector's growth for the period 1995-2009.
These figures suggest that the transition from paper based Print to ePrint has so far been successful and that the industry has even grown during the transition from paper to online.
This means that Meeker is probably correct in here assumptions that the transition from offline to online Print represents a significant growth opportunity for the internet.
The problem is - as this chart illustrates - the sector as a whole is not growing as fast as the market leader (i.e. TV).
Prior to the introduction of ePrint the advertising revenues of the old paper based Print sector was actually growing at about half the rate of the combined TV sector (i.e. Free To Air, Satellite and Cable). This means that, prior to the arrival of the internet, the Print Publishers were on track to grow their advertising by at least an extra 32% or 10% above the growth achieved by the joint print and online sectors.
This means the growth in the combined sector has actually shrunk by 10% over this 14 year period.
Now let's factor in Google's share and discover what this does to the growth across the two sectors.
Once you extract Google's growth out of the US online Advertising spend you discover the combined sector's growth has slipped by 24%.
Basically growth in the online advertising sector has flatlined since Google's IPO.
So, far from being a significant growth opportunity for the publishing sector, the ePublishing revolution has proved to be a disaster. Not only has the internet reduced the industry's here to significant "barriers to entry" to virtually zero - thereby allowing new entrants to disrupt the established players with Freemium offerings - it has also put the brakes on the long-term growth potential of the combined sector.
At the birth of the web the print sector was on track to become a $77.5 Billion advertising engine by 2009. Sadly, even before you take Google out of the equation, the combined revenues of the print and the online sectors fall well short of this figure.
This means the transition from print to online has resulted in a significant loss of revenue across the combined sector. So much so that the online advertising would have already been worth $36+ Billion in 2009 if it had successfully transitioned the long-term growth from the paper based sector into online growth.
Somewhere in all this market disruption $14 Billion per annum in online advertising revenue has been lost to the ePublishing sector.
The next question is - assuming the US ad spend is a zero sum game - where did this lost revenue end up? The simple answer is TV and Direct Marketing. But the headline story is how Google has pivoted online media by solving the only problem worth solving on the network: Discovery
Data Sources
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