Although a Fabius Maximus post, The online bubble is bursting, makes a good argument that we are probably witnessing a tech bubble bursting, I think that has more to do with irrational company valuations and a subset of social media problems rather than online advertising problems. If Facebook or Twitter collapses do we stop buying goods from Amazon? Even if all of the companies described in the Kalkis Research paper, End Of The Online Advertising Bubble, collapse does that mean we stop buying goods from Amazon or stop using Google for comparison shopping? I don’t think so. Online advertising is dominated by Google and Amazon is making many forms of online advertising less valuable. When you think about the history of the Internet and online advertising, the problems are evolutionary. The biggest problem facing online advertising is the creative destruction forced on the online shopping market by Amazon. I work for a small online retailer. A couple of years ago the shopping experience consisted of a customer searching for a product and then following one or more of the ads or links on the search results page to an online retailer. In a world dominated by the Google search engine, it is not surprising that our largest and most cost effective source for orders was Google AdWords. Despite the occasional abuse and fraud from pay per click vendors and the weirdness of search engine optimization strategies, this was a pretty good business model for an online retailer to drive traffic to their site.
Today the largest and most cost effective source for orders is Amazon. Amazon has two things going for it, customers are increasingly going to Amazon for their shopping experience and Amazon has a viable alternative to the pay per click business model for online retailers. Many Amazon customers expect Amazon to have the lowest price. Our web site analytics say our customers have dramatically reduced the number of times they are using Google for comparison shopping. The most important change for online retailers is that Amazon’s unique business model says that Amazon gets paid only when they process an order. This solves several problems for retailers. Retailers do not worry about Amazon orders causing pay per click abuse, credit card fraud, or payment processing problems. Since the percentage Amazon charged us for an order was less than our pay per click advertising budget, it was an easy decision for us. To increase sales and profit we listed more products on Amazon and cut down on our online advertising. In a flat retail market our Amazon sales have gone up, our Google sales have gone down, and our profitability has gone up slightly. We live to fight another day.