Slashdot Cofounder Jeff Bates on the Self-Cannibalization of Online Advertising

At one point in the U.S.’s development, there were 1,400 or so railroads. Today, there are three major lines. Admittedly, it is a leap — but not a big one — for Jeff Bates, cofounder of Slashdot, to apply that history to what is happening on the Internet today.

“If the Internet has taught us anything in the last 10 years, it is that the timing of a particular market’s development becomes even more compressed,” he tells the E-Commerce Times.

Bates is referring to the online ad networks and their accompanying strategies that are proliferating by the day. To be sure, there is Google’s heft and reach, and most in the industry, including Bates, agree it is the network to beat right now. At the same time, there are countless smaller platforms, including a growing number of industry-specific offerings.

Slashdot, it must be pointed out, is one of the first truly vertical sites to have survived on the Internet, and Bates has spent the last 10 years watching which ad strategies have worked there and which haven’t. His conclusion about the current online ad industry? “A lot of these platforms are going to fail.”

E-Commerce Times: So taking the railroad example a bit further, what lessons can be applied for today?

It is not just the railroads. The stock exchanges that existed in almost every city in the 1920s are another example. Except for New York and Chicago, they all died off because they did not have the scale that was needed to survive.

ECT: So everyone except Google and Yahoo is doomed?

I wouldn’t put it that way. But that tier beneath Google and Yahoo is overly saturated at this point. I went to an industry conference in New York earlier this year, and there were 70 different companies presenting. That tells me there will be some fallout in this space.

ECT: What will mean the difference between survival and not for these companies?

Either you have a unique proposition or unique way of doing something — or you succeed through volume. The latter, though, has been pretty much locked up by Google and Yahoo.

ECT: What are the implications for Web 2.0 firms that are basing their business models on online advertising?

It may be brutal for them. Right now, trying to stake a business on [online] advertising is like trying to sell the best carriage ever while Ford is rolling out its first Model T.

ECT: What about the companies that actually buy the ads to run?

It is interesting because all of these [ad platforms] are becoming self-cannibalizing to a certain degree. Because these are commodity-style offerings, it is becoming a race to the bottom in terms of revenue. And the smart agencies are figuring out how to play these guys off of each other.

ECT: Besides lack of scale, what other problems do these platforms have?

Staying ahead of the curve. Look at how quickly Google is moving. It has gone from search to text to video advertising in a matter of years, and no doubt is planning another rollout based on what it thinks is the next big thing.

ECT: What is the next big thing in online advertising?

The next evolution will be behavioral targeting, compared with contextual targeting. Right now, throwing up an ad from a financial service company, for instance, next to an article about banking is primitive, really. What these companies who advertise really want to know is who these people are who are reading the articles, and how can they target them. Where did they log in from? How often do they visit and at what time of day? What browser do they use when they visit? What do they do on the site? All of that information will help them determine at what point in the content consumption cycle they can most successfully target the reader.

ECT: Some of the industry-specific ad platforms — I am thinking about a few in the healthcare sector right now — already do that. Do your prerequisites of scale and expertise still apply to those sites?

Well, certainly expertise still does, but not scale. Those [industry-specific platforms] have a better chance of making it. They don’t care about being, or have to be, the biggest fish in the pond. All they have to do is do well in that particular space. Healthcare, in particular, is very interesting because it is so personal for people that are seeking accurate information.

ECT: The industry is still very new, but can you call a winner right now, say Google?

Well, five years ago, I would have told you it would be Yahoo. That is a good illustration of how fluid the market is. We don’t know what the next big shift will be. What if there are new tech developments that push people away from consuming content on Web pages to the phones, for example? That is happening to a certain degree, and is not quite the example I am looking for, but you see what I mean? Trying to predict huge shifts like that can be difficult.