Why the web economy will continue growing rapidly

Here’s the really good news for the web economy over the next decade.  Consumers are spending more and more time online, yet only about 10% of all advertising dollars are spent there.

Let’s assume that, over time, ad spending on a medium becomes roughly proportional to the time consumers spend using that medium. I doubt there are any technologists reading this blog who doubt that in five years most people in industrialized countries will spend 50% or more of their “media time” on the web.  This means there are hundreds of billions of ad revenues waiting to move to the web.

Advertising is usually divided into two categories: direct-response and brand advertising. Direct-response advertising tries to get users to take immediate action. Brand advertising tries to build up positive associations over time in people’s minds. In the past decade, we saw a massive shift of direct response advertising to the web. The main beneficiary of this shift has been Google. We saw far less of a shift of brand advertising to the web.

It is therefore very likely that most of this new ad spending will be brand advertising.  This is why Google, Yahoo and Microsoft are all so intensely focused on display advertising. It is why they paid huge premiums to acquire Doubleclick, Right Media, and Avenue A.

Right now there are lots of inhibitors to brand advertising dollars flowing onto the web. Among them 1) most of the brand dollars are controlled by ad agencies, who seem far more comfortable with traditional media channels, 2) it is hard to know where your online advertising is appearing and whether it is effective, 3) banner ads seem extremely ineffective and are often poorly targeted, 4) big brand advertisers seem scared of user-generated content, today’s major source of ad inventory growth.

But economic logic suggests these problems will be figured out, because advertisers have no choice but to go where the consumers are.

5 thoughts on “Why the web economy will continue growing rapidly

  1. “This is good news for start up employees, directors, and advisors who are awarded stock options. Their options are economically as valuable as stock but have better tax treatment.”

    I am confused by this statement. At my company, we have done a moderate convertible note round. Our early employees are participating in a restricted stock plan, because they can purchase shares at par and pay only capital gains tax upon exit. Moreover, they will not be faced with the dilemma whether to exercise the options or not within 90 days (a typical term in stock option plans) if we part ways with them in the future.

    Am I missing some reason to offer options rather than restricted stock?

  2. I’ll be entirely honest and say this post confused me a little and I’ll probably have to reread it to catch some of the more intricate (or convoluted, depending on how you look at it) details.

    That being said its a great post with some valuable advice to future and existing founders, but it almost strikes me as worry some that someone would invest so early with the intent of basically screwing the founders of the company in the long run by taking such a large share (in reference to the Super Pro Rata bit at the end)

    I know its naive to assume that people will always be honest, but I would hope you’d work close enough with this person and that there is enough common sense and good will in the investment community to keep those to edge cases.

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