Online millions: The advertising model

Part one is here.

You will probably never make millions from online advertising, no matter what type of website you run. However, if you are able to create a site and attract a reasonably sized and loyal audience, you can sell the site to a bigger player who can exercise the advertising potential. That’s how much of the internet millions are made.

Let’s talk about some extreme examples.

Facebook has a valuation of more than a 15 billion dollars as a result of a recent 5% 1.6% purchase by Microsoft. There has been speculation about how much money Facebook was generating in advertising revenue prior to this, but the numbers are actually irrelevant. Microsoft saw value in the audience. How, when and if that value will ever be realised is frankly Microsoft’s problem, not ours. What we care about is that if we can build a website with a focused and dedicated audience, there will undoubtedly be a buyer for it. The bigger the audience and the focus, the bigger the price ticket.

Similarly, Google bought YouTube for $1,65-billion, due to the dedicated and loyal audience the site was able to generate. Google has now started to monetise the site, presumably to some success.

Another success story in the making is Twitter. It has not yet been acquired, but is reputedly well on the way to having 100-million users within the next two years. If Twitter is then able to serve one ad to each user per month, at a clean 10-cent profit, that’s $10-million in its pocket per month. If this is off by 90%, then it is still $12-million a year.

The above examples are admittedly of some of the biggest players in the game, and you should not feel that you need to aim that high. But the pond is deep and the big fish numerous. In fact, according to PartnerUp:

Smaller acquisitions in the $5-million to $20-million range are happening much more frequently than in the past. This is likely because acquirers are snapping up start-ups before they raise substantial capital, making the acquisitions much less costly and providing the ability to do more deals.

Here is a short list of some recent acquisitions that did not rely on a serious technology breakthrough (and were thus much easier and cheaper to set up):

Fireant, a podcast directory, acquired for $400 000.
Insiderpages, a customer-generated review site, acquired for a reputed $13-million.
Sidestep, a discount travel search site, acquired for $200-million.
Howstuffworks, a website that tells you, umm … how stuff works — acquired for $250-million.

Jason Calcanis, who himself is an online success story due to his involvement in Netscape, had this to say when analysing Twitter’s potential business models:

“Once you have critical mass, you can’t help but make a fortune. An absolute idiot with 10-million to 20-million users can make a ton of money.”

He’s probably right, but the truth is that it costs a lot of money to build a site with a significant audience. And there are no guarantees. It’s not easy. It can’t be. If it were easy, it would not be worth a lot of money to get it right.

But it can be done, and Calcanis hints how to do it when he says:

“If … you don’t have unlimited access to capital, do not take this advice and focus on building revenue streams.”

The good news is that it is surprisingly easy to set up a website, even one that has cool features and interactivity. It is fun, exciting and challenging. The difficulty, though, is in being able to sustain it through its growing — and teething — stages. This could take anything from one to three years. And the chances are that you are going to be doing this part-time, while you continue to make a living elsewhere.

It is important, therefore, that you have a realistic plan on how you are going to sustain your project. The best option would be to attract venture capital, but that (in an ironic twist) is difficult to do if you do not generate revenue. Your next-best plan is to rely on cheap (or ideally free) marketing to spread the word, and a simple monetisation plan that would cover the bills.

This is where, and how, online advertising will help you get to your fortune. It will sustain your growth until you are big enough or have shown enough potential to be considered an asset to a bigger player.

Here is your new to-do list, then:

3. Monetise it to sustain it.

Never forget the three ingredients of your online project:

niche market,
the right platform, and
monetisation possibilities.

Keep them in mind as you develop your idea, because they are extremely reliant on each other and you need all three to be strong if you want any hope of success.

As you start deciding what niche you want to work with, start investigating the different option of platforms available and cross-check both options against the monetisation possibilities.

My next three posts in the series are going to address each of these topics individually.