$12 billion was spent in online advertsing in 2006...Google has built their business almost entirely on advertising...Online advertising $ is skyrocketing while TV and print are stagnant.
Advertising is a perfectly legitimate business model.
Advertising is a perfectly legitimate business model.
That is a VERY simple assertion relating to something that is a bit more complicated. I think most people here should brush up on the idea of attachment networks, or organizational ecology. I'll give you the short version, the top two companies win where preferential attachment is what determines whether a user stays with you.
Of course there are exceptions. For instance, one could be providing information on a web site that would be a challenge to get elsewhere. The Wall Street Journal comes to mind. With these companies, attachment is irrelevant, if a user has a great need for the information s/he MUST go to the Wall Street Journal.
Most of the web 2.0 startups I have reviewed, and there have been many, are NECESSARILY based around preferential attachment. I understand this tendency. After all, if startup Y can implement the idea of startup X in less than 3 months time, then startup X will have an issue to deal with. So it is in the interest of startup X to make sure that users prefer them. Add to that the fact that most are banking on providing the user convenient access to his OWN data, and you have the makings of a good number of also rans.
I always ask, what happens if the user takes his data elsewhere?
"It'll never happen", is usually the answer.
I inquire as to the possibility of a recession and a concomitant slow down in internet advertising. Like all of the 25 year old mortgage brokers 4 years ago, most of the founders look at me like I just came from Mars. There is a new economy, get on board or get out of the way.
So I walk a little ways off...
And wait for the wreck, maybe I can get a good deal on parts.
There are, of course, both advantages and disadvantages to an advertising-based business model. As you say, advertising is likely to be volatile during a downturn. Also, the type of sites which rely on the eyeballs--advertsing are often easy to 'spoof'. (Low attachment.)
The advantages of advertising is that it's simple to implement. For a YC-type company, with a few $K funding and a few people writing code, there is probably no easier way to start generating revenue. No sales team neccessary, no 'critical mass' of business customers, no need for corporate partnerships.
There are risks in any business model, succeeding will alwyas take incredible skill and incredible luck, but with $12 billion in advertising spending each year, many successful companies have been and will in the future be built upon advertising.