Here's An Idea: Distributed Development, Centralized Distribution

This Ad Age article points out what more than a few people were whispering about Web 2.0 start-ups, that there may simply be not enough ad money to go around for all of them. Here’s an excerpt:

"My concern is the really great concepts that are features, not companies," said Ross Levinsohn, former CEO of Fox Interactive and partner in Velocity Interactive Partners. "There isn't enough advertising to support all those features, and in compression times, advertisers tend to flock to safe names and sites that have real traction." One could excuse the latest crop of start-ups for their undue optimism; almost all were conceived, funded and began operating in boom times.

Online advertising rebounded from three years of negative growth in 2003 and has grown at more than 20% a year (actually, more than 30% in 2004, 2005 and 2006) in the five years since. But onetime hyper-growth is coming to an end. If trends hold, online advertising will grow in the low double digits or high single digits this year, driven largely by search. While declining growth seems unlikely, the venture-capital community is preparing its portfolio companies for coming years of lesser incremental growth.

Now surely this does not shock the people who read OLDMTA. But one thing I really do want to point out is that these 2.0 companies are truly driving the lion’s share of innovation. No shocker there.

And frankly, innovation is what they are good at. What they are NOT good at is being viable businesses.

What that means, in my view, is that we may need to think about these companies in terms of more realistic multiples and valuations. As someone who started in the regular business arena – you know the kind of company, one where 12% growth would be a fine year instead of the preamble to a run on cyanide, I don’t understand how people can continue to expect everything to be worth a billion dollars.

Why can’t the model be more focused on distributed development but centralized consumer media properties; a smaller number of major properties that buy the features developed by start ups for a reasonable price that gives innovators compensation for their risk and still lets the buyers make enough money by improving service for consumers and marketers.

Or another alternative, centralized selling for a variety of innovations under a common rubric that provides the scale and convenience brands need.

One way that our space has not caught up to itself is that media fragmentation has been viewed as a problem for marketers rather than for the start-ups. But the reality is that fragmentation also significantly reduces the odds of a billion dollar payout for a feature innovation. Billions of views doesn’t necessarily translate to billions in revenue. Ask Google about YouTube.

In sum, what’s wrong with a $30,000,000 selling price, instead of a $300,000,000 one, if you can simplify your org and reduce the payout timing? You can forego the complex sales and other organizations and do what you want to do anyway – innovate and change the world.

Thanks for reading, and don’t forget to write.