What do you do when you're an ad supported business and the ad industry takes a nosedive? You change your business model. That's what a good number of formerly ad dependent companies are doing this year.
Today the Wall Street Journal profiles companies — like Slide, RockYou, Zynga Inc. and Meez — that have branched out into new business models after the online ad industry began to falter last year. While most of the alternate revenue streams are untested, they point to an interesting phenomenon.
Last year, many of these companies were focused on making widgets and applications for social networks like Facebook and MySpace. To capitalize on their popularity, the companies planned to sell advertising against their creations.
But plans to reap in advertising revenue soon proved faulty. Slide Inc's SuperPoke, for instance, was a big trend on Facebook last year. So much so that the company opened ad-sales offices in New York and started selling various online ad formats. Now, a year later, Slide is shifting toward branded entertainment campaigns, upselling its games to committed users and building up its virtual-goods business. The company hopes that segment will bring in the majority of its revenue this year.
Slide's VP Keith Rabois tells SiliconAlleyInsider:
"Standard ad units are mostly an interruption or a speed bump on the user experience. We only want to be selling integrated sponsorships that are consistent with the user experience and hence leverage our applications' brand value to boost the clients appeal to the Facebook demographic. We value this ability and will only be selling these at $500k to $1 MM."
Other companies, like Meez, are banking on virtual gifts. Meez lets social media users create animated characters and the company's founder Sean Ryan spoke with the WSJ:
"Mr. Ryan says selling virtual goods is a better model. One example he is betting on: dressing up online characters, or avatars, with virtual clothing, such as a $3 Rocawear T-shirt. Slide, the maker of SuperPoke, sells items for $1 to $50, ranging from a tool that created background scenery for virtual pets to the spoofs of famous paintings."
So are people going to buy a lot of virtual goods in a down economy? That remains to be seen. But diversifying revenue streams makes a lot of sense in a shifting economy.
Online advertising is not on the decline like so many other sectors, but its revenue has not been growing at the healthy clip once predicted. And many analysts are convinced that advertising dollars lost this year will not be bouncing back. Findings released by Veronis Suhler Stevenson today found that ad spending dropped 2.9 percent in 2008 to $210 billion. And while Veronis Suhler predicts Internet ad spending to grow 9.2 percent to $23.8 billion in 2009, it isn't banking on the ad sector. According to the New York Times:
Advertising is a decreasingly important part of the communications sector, compared with the other overall categories Veronis Suhler looks at — marketing services, consumer and products and information sold to businesses.
“What’s really stark is that advertising, which not so long ago was the biggest part of the overall pie, is now the smallest part of the pie and is shrinking at a pretty good clip,” said James P. Rutherfurd, executive vice president and managing director of the firm.
A year ago, some of the most hyped Internet companies were widget and application makers. But widget fatigue has set in. And the starkest lesson of the new economy has been that even if you make products that people like to use, it doesn't mean you will profit from them.
Even if virtual goods and sponsored branding opportunities don't take off for these companies, adding new revenue streams can't hurt.