The Online Advertising Multiplier Effect

Here's my really big thought: What if online ad spending STILL hasn't passed the 2000 high watermark of $8.0 billion?

That's crazy, you idiot! We already did $9.6 billion in '04, and are zooming past it this year (all IAB numbers). True enough, but my contention is that spending by actual end-use advertisers still isn't where it was way back when. The reason is what I'll term the Online Advertising Multiplier Effect.

Back in the good ol' days of the last century, most publishers did some form of direct ad sales, nearly all of it on a CPM (or similar) basis. Hit up some newly funded (or IPO'd) company for a good chunk of capital and then try to find a way to actually live up to the promises that you made. Yes, there were some networks (DoubleClick ruled the roost) but they were fewer and smaller, and some actually only booked their commission on the topline. It's a very different world in 2005. Performance-based is the majority of the market now, and because of that, it is cheap, easy and necessary to have partners try to move as much inventory for you as they can. As a result, many parties touch most ads, and that same dollar of actualy spending winds up being recorded twice, thrice or even more often. Proof points:

• In Q3, Google had $530 million in Traffic Acquisition Costs, which it defines as "the portion of revenues shared with Google’s partners." That's $530 million that OTHER companies are reporting as top line revenue. Google reported its own sales -- which do not net out traffic costs -- were just shy of $1.6 billion during the same period. Add these together, and you've got a market impact of $2.1 billion.
• Shopping.com shows that the multiplier is often a lot bigger. In its Q2 10Q (final independent filing), the company revelas that $12 million of its $28 million in revenue (43%) came from Google ads placed on its site. At the sametime, Shopping.com spent nearly $13 million on search advertising to bring in its own traffic! (Questionably categorized as Marketing Expense, rather than COGS where it really belongs.) You could certainly make the argumement that these sums represent in $25 million in spending (bartering) that pretty much nets out to zero.
• The coregistration churners like Adteractive and Azoogle add even more hands to the pot. Each company claims to be doing about $100 million in revenue this year, and needs to spend about half that amount on search and other partners to drive the traffic they need. But wait, there's more! To manage these massive search campaigns they need to turn to big SEOs like Efficient Frontier, who take their own 10% cut. All of a sudden, each dollar in 'true' ad spending is now delivering a buck-fifty-five to all of these players, and that's before factoring in the cut taken by the agencies on the front end.

Net net, is the industry really growing? Yeah, absolutely. Many thousands of real companies pushing real products are putting more and more of their ad spend online. But this revenue merry-go-round is making everyone a lot more euphoric than they ought to be. Plus, as the game gets bigger and goes faster, it's only a matter of time before the fine folks on FASB take a hard look at everything, asking questions that are going to open the trap door under the industry once again.