Niel Robertson came by my office today and we had a great 1 1/2 hour conversation about everything from SAP/Oracle business to online advertising arbitrage. The advertising topic is what spurred this post upon reading Will Hsu's post about the Dark Side of Network Effects. I had a good laugh with Niel when I told him about the recent Under the Radar event and how every company that got onstage seemed to have the same answer to the "what's your business model" question: "we are advertising driven".
If you run the numbers on the wide range of companies that intend to be advertising revenue based you quickly come to the conclusion that the numbers just don't seem to work unless they have extremely well targeted demographics and high value click throughs. in other words, getting paid $30 for an insurance signup clickthrough (CPA/CPC) only works if it costs you less than $30 to deliver that one clickthrough. For most businesses they won't get to those numbers, as per Will's post, and they won't get to the kinds of volumes that are required to sustain a low value CPM driven model.
With Microsoft building the "Internets largest advertising network" I would suspect that online advertising will continue to be a buyers market.
this is a cautionary tale for all the web 2.0 plays out there. . . if you attract the wrong kind of community initially, you are building the wrong kind of network effects that could quickly deterioate