Last Tuesday, I was wondering if Google might be dropping AdSense because of the weaker performance in recent years. My opinion was that it would be likely, but it seems that Google took other measures to cut costs. What could this mean to those that are fighting it out to make a fortune in the Web 2.0 world that exists because of the Attention Economy?
This past weekend, the blogosphere was buzzing about Google's announcement that they will be discontinuing some of their services; Notebook, Dodgeball, Jaiku, Mashup Editor, Catalog Search and turning off uploads on Google Video. In addition, they are terminating contracts with external recruiters, cutting 100 internal positions and closing down engineering offices in Austin, Texas; Trondheim, Norway; and Lulea, Sweden; relocating the workers to Mountain View, California. They also reduced the account limit on Google Apps from 100 down to 50. No doubt in an effort to get more revenue from it.
These services weren't very popular by Google standards and you probably haven't heard of most of them. The real story here isn't that some people may not have access to these services, but rather, is this the warning bell for Web 2.0 companies who make their living in the Attention Marketplace?
What is the Attention Marketplace?
In an Attention Marketplace, or Attention Economy, you don't sell tangible goods or services, you sell other people's attention. You develop a way to get their attention and then you find someone who would be willing to pay for access. This is the basic principle behind advertising in most mediums. You create a great TV show, you get a lot of viewers, people will pay you to show commercials to those people. You don't get paid for the quality of your show, you get paid for the quality of the response from your viewers.
In the online world, you don't monetize your content, you monetize your traffic. Many Web 2.0 start-ups have been relying on this principle to make money and Google's AdSense program is the main revenue source they turn to.
What's wrong with the Attention Economy?
Donna Bogatin, of ZDNet, questioned this business strategy back in 2006, saying:
In the fast-track Web 2.0 start-up world, “business model” does not seem to factor into “stealth mode” or “public beta” or “soft launch” strategies. Many Web 2.0 start-ups that make Web applications and services available to the public for free, first stake their claim to a piece of the Social Web real estate, and then, sometimes as an afterthought, look to Google to “show them the money” through AdSense.
Today’s start-ups’ reliance on “monetization by Google” differs from business model focused strategies of the first wave of the commercial Internet. While the 1990’s Internet “bubble,” is known for the free-flowing VC money that bankrolled flimsy “back of the napkin” business models, at last the need to specify a business model was recognized.
The New York Times also had a similar article on how Popularity might not be enough.
Last November, Dharmesh Shah put out a video on his OnStartups.com blog about his experiences creating successful startups where he makes reference to the attention economy. His opinion is to charge users and not rely on it because there is only a limited amount of attention out there.
Since there is only a limited amount of attention out there, and tons of speculators rushed into the market to grab their share, the market was quickly saturated. Instead of gathering their own attention, many people and startups ran out to buy attention and then try to sell that.
This is similar to the recent housing bubble where it wasn't uncommon for one property to change hands multiple times within a couple of years. Each time being sold for more than the last until the housing market Ponzi scheme fell apart.
You start up a site or blog and you don't get the type of traffic you need so you start buying advertising on sites like AdWords. A user does a search on Google, clicks on an AdWords link that leads them to a site that has AdSense ads on it which they click and find another site with AdSense. With each click, each AdSense publisher is hoping to make more than they spend.
With people pouring money into online advertising to make money from online advertising it creates a vicious cycle that inflates the cost of advertising. The process is called AdSense Arbitrage and Google took steps last year to at least minimize it by applying a landing page quality score to people using AdWords. If your landing page quality score was poor, you'd wind up paying more per click. This reduces the likelihood of profiting from AdSense arbitrage which reduces the incentive for the practice.
Why other Companies Should Worry
Google is a big Internet brand. They have the most popular ad network. They have tons of talented people working for them. If Google is having a hard time making money off of Google's ad network, what will that mean for others that have to not only deal with Google taking a cut, but also things like Smart Pricing?
Last month, eMarketer drastically reduced their projections of MySpace and Facebook revenues. The companies themselves also changed their outlook and many smaller AdSense publishers are even complaining about major drops in their AdSense revenues.
eMarketer also mentions the $900-million deal they signed with Google to use Google Search on MySpace.
Further affecting MySpace in the next few years will be the end of a $900-million deal with search provider Google in 2010. Though the company will likely sign a new search partner, the terms of that deal will be nowhere near as sweet.
The down turn in the economy has forced people to spend their money wisely. That means people are buying less products and looking for better deals. There's also less funding for startups. People need to be smarter with their advertising budgets. Instead of just blindly bidding as much as they can for keywords, they smart players are going to look closely at how their advertising performs and converts into real money, then make the appropriate changes in their bids. Many speculators have also been taken out of the market. This seems to be evidenced by the number of people complaining about their drop in AdSense earnings.
While Web 2.0 is not dead, things are definitely going to change. What we're seeing now is the end of the second tech bubble.