The Online Advertising Market

"There is nothing quite like the opportunities that exsist when a market is immature and simplistic prices are given to the assets [websites] being bought and sold"

The online marketing industry has skyrocketed over the past several years. The stage of growth and transformation it is currently in provides for ample opportunity to extract exceptional value with the proper time, planning, and analysis. The greatest examples of wealth creation can be taken from the development of new markets. There is a basic fundamental reason for this as well as an opportunistic reason. The fundamental rules of markets dictate that larger profits are made in the early stages of market development. The very early stages may start with few players each capturing large profits. As more and more participants join the market, the profits for each will begin to diminish, all else held constant. The fact that the size of the market is increasing on both the supply and demand side dilutes the profit determination since the whole pie is growing, allowing for more slices of equal size. The individuals that move into newly developing markets are better suited to capture larger profits.

The opportunistic standpoint is a lot more exciting. Markets generally go through many speed bumps or growing pains as they develop. The best example is a product being overpriced simply because there are not enough producers. The prices paid by consumers do not reflect the value of the product. The more important examples revolve around ancillary markets. New markets typically have many ancillary markets of related goods and services. This is where the real opportunity to extract incredible profits exists. A good example of this scenario is the development of the PC market. As PCs flooded homes across the globe, millions of various ancillary markets developed such as specialized software, mouse pads, computer-specific desks, and the computer service shop. The opportunity in this situation lies within the idea. When a market is growing and developing, there is typically a need for ancillary markets. A related product or service is needed and the buyers are already out there. At some point in time, nobody used an anti-glare screen over his or her monitor or a rear-view mirror for the workplace. In the beginning of these ancillary markets there were limited suppliers of these items but now you can find them anywhere. This is simply an example of taking advantage of a developing market. As time goes on, more and more of these little ancillary markets develop around a primary market and large profits are captured for the lucky ones that jump in.

The basis of this discussion is that the best opportunity to extract large profits from any given market is when the market is in development phase. The market for which this book was written is online advertising, specifically the creation of net positive cash flows and using those cash flows to determine a value, or price, for a web site. Specifically, the buying and selling of developed websites. Still in its infancy, the online ad market first started developing in only 1994. It wasn't until the late 1990s when companies started to take this marketing channel seriously. During the dot.com bust of 2001, the market took a serious hit as did everything related to the net. It was just recently that the online ad market began to resurface, and it is coming back faster, bigger and more robust then ever before. Advances in web related technology has allowed for more precise and dynamic ad products, as well as more detailed tracking of ad consumer's habits and trends.

As discussed earlier, a market needs a product, pricing, demand, and supply. Here are the basics for the online ad market:

The Product

The ad space itself is the product. Whether it is a banner, a text link, a simple message, or a popup browser, it is not the physical ad itself that is bought and sold, but the space, placement, or right to display it. An advertiser pays for his ad to appear in a certain location in this market, not the ad itself. Sure, he may pay a firm to develop the ad, but that is a creative development service and a distinctly separate market from the one discussed here. Some examples of products may be a search engine ranking (i.e. were in the list of results an advertisers page shows up when a related keyword or phrase is entered into Google) or text ad space along the side of a web page.

Above is a sample. Read the full chapter.

Prowebvalue Blog: "Adventures in Buying Websites"

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Prowebvalue Blog: "Adventures in Buying Websites"