Market Correction, Marketing Budget Cut

I just read two related blog posts (Calacanis here and Blodget here) and I share with them the view (out of my own past professional experience) that the recent market correction might have a large impact into the revenue stream of most Internet companies. Why? Well, if you run a company (and I am talking about a regular, any kind of company, not necessarily an Internet company) and the market slows down for a reason, you most likely need to reduce cost temporarily to mantain your cash flow level. Where do you take it? Well, there are not many places where you can do so without firing employees (which is usually a very last minute thing after you have tried everything else since that is very painful not just for the people leaving but also for the people staying and for the managers executing and communicating that to the company). In the P&L you have got what is referred to as the "controllable expenses" which are all the expenses that you can theoretically control like travel expenses, legal, contractors, etc. but unless your company is in a very special business that uses tons of lawers or relies heavily in contractors, controllable expenses are just somewhere around 5% of your total expenses. So there is not much you can do just reducing controllable expenses. What else? Well, the marketing budget. That is typically a place you can cut temporarily without raising any panic around the office and without doing something that might have long term impact into your business. So when the economy slows down or there is a sign of recession, companies tend to first reduce marketing costs and that also means online marketing costs. This then will mean less revenue for Google, Yahoo! and any other Internet company that relies solely on online advertising revenue (which means 99% of the Web 2.0 companies). Blodget mentions that after last crashed 50% of online advertising revenue vanished overnight. I do not think that it will be this bad now (first, we are just on a "correction" and not clear whether this will be a long term crash) but still we might see either reduction or much smaller growth on that market which might also impact valuations of companies like Google, M&A activity and VC activity so the Web 2.0 bubble (or sort of) might burst.

 

CD

 

Technorati tags: bubble Web2.0

Comments

[Oriol]

mmmmm... from other point of view, you could think that the costs of the "traditional" offline marketing costs are, comparatively with the results obtained, very much higher than the online ones. Thus, you could think that in a market "correction" scenario, the companies that have huge offline marketing budgets could shift from offline to online marketing in order to cut costs... you could build a solid virtual social network with your customers with the cost of a regular big company TV campaign ;)