Crash 2.0: Cash and Burn

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No sooner has web 2.0 started gaining momentum than digital doom-mongers are warning that the dotcom bubble could be about to burst, again. Concerns over ‘crash 2.0’ centre on the huge amount of investment pouring into the sector, creating an environment in which too many companies are chasing too little advertising revenue.

Last week, Maurice Levy, chairman and chief executive of Publicis Groupe, became the first to openly question the rocketing valuations of web companies. He likened the growth of those whose business models depend on the expansion of the online advertising market, to the dotcom crash that rocked stock markets almost a decade ago.

“Far too many are building plans based on advertising and they may well be disappointed because there is not enough money for everyone,” he said.

Talk of a second dotcom bubble has been fuelled by a flurry of web 2.0 acquisitions in the past two years, with media owners jostling for supremacy in the digital space. Most recently, Microsoft announced its $240m (£117m) acquisition of a 1.6% stake in Facebook in a deal that values the social networking site at $15bn (£7.3bn).

In October last year, Google snapped up YouTube for $1.65bn, while Rupert Murdoch’s News Corp splashed out $580m on MySpace in July 2005. “Some of these valuations bear little or no resemblance to reality,” says Andy Hobsbawm, European chairman of Agency.com.

The huge price tags are testament to the growing popularity of sites dedicated to peerto-peer communication. Facebook has more than 29m monthly unique users globally, compared with 77m for MySpace and 103m for You-Tube , according to the latest figures from Nielsen Net// Ratings. Despite this, few of the web 2.0 heavyweights have managed to effectively profit from their audiences through advertising.

Facebook has only just launched a commercial service providing brand-owners with targeted marketing opportunities, while MySpace is struggling to achieve scale and YouTube’s advertising offering is still being trialed. Dozens of internet companies are popping up daily in an effort to capitalise on the internet boom.

There are offerings emerging, such as social networking site iminlikewithyou.com, handmade goods site etsy.com and ‘community-based’ T-shirt retailer threadless.com, which have innovative business models that don’t rely solely on digital advertising. However, most second-generation dotcoms do depend entirely on adspend for survival. “We’re reaching a stage where there are simply too many media owners chasing too little advertising revenue ,” says David Eastman, chief executive of Zulu.

There is no denying, however, that the online advertising industry is in rude health. UK revenues are expected to surpass £2.7bn this year, compared with just £153m at the height of the dotcom boom in 2000. This growth is predicted to continue at the expense of traditional media channels as digital moves further up the value chain.

Despite this, as competition grows fiercer, it will become harder for companies to establish a cost-effective business model based entirely on online advertising. “Just because you can generate 50m monthly page impressions doesn’t mean you are guaranteed an income from advertising,” argues Jean-Paul Edwards, head of media futures at Manning Gottlieb OMD. “If you don’t work hard to be relevant and attractive to brands, you will go under.”

Compliments of: Brand Republic


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