Yes, you read that right. Monetization does NOT equal revenue. I’m tired of hearing about Web “applications” that are promising venture capitalists that their ad-supported business model is going to be successful and yield that 15x return their looking for.
Monetization, as I define it, is using advertising to make some money off of your Web site. It is not recurring revenue that results from users willingly paying for the service.
This is a dangerous model to put much faith in for a number of reasons. The first is the visceral reaction the general public has to advertising. When was the last time you thought to yourself, “Man, I really liked the annoying Flash ad. I must go see ‘Legally Blonde 7: Divorce Rules.’ ”
Advertising is effective as a brand awareness driver. If you’re letting advertising dictate your purchasing decisions, then that’s a separate issue. What advertising is not, however, is a model on which to build a business. Because the only one getting rich off of ads is Google.
When a Web application is so valuable that people willingly pay a monthly or annual fee for the pleasure of its use, that is revenue. Revenue is profit. Revenue is a viable, sustainable model for growth and success.
When a Web application offers functionality that either increases my productivity or adds value to my life, I’ll gladly pay for it.
So, when I saw that LinkedIn recently completed a founding round of $53 million, I nearly choked. Not only does this value the company at $1 BILLION, but it also gives them plenty of ammo to fire across the bows of upstart SocNets. According to the LA Times, LinkedIn has been profitable for a couple of years. So, where does this revenue come from? I don’t pay for it. Nor will I.
So, in the chart I’ve embedded from the Interactive Advertising Bureau, the growth rate of online advertising revenues has been astonishing. In Q1 of 2008, online advertising revenues were approximately $5.8 billion. So, why do these companies need so much venture capital? I think it’s because that “revenue” is only being realized by the ad networks and not the apps them selves.
It kind of pains me to link to Valleywag, but they did the dirty work for me on this. Time recently announced its 50 top Web sites and Valleywag made some quick and dirty analysis (really, is there any other kind?). Of the 50:
- Google ads: 18
- Microsoft ads: 1
- Yahoo ads: 2
- In-house ad sales teams: 3
- Sell goods: 2
- Sell physical goods: 1
So, of “Web sites,” advertising is obviously a good way to make some revenue. But for businesses, it’s all about subscription models and real users paying real money.
How will you make your profit?