Advertising - Phooey!

Five or ten years from now, we will remember Microsoft's failed bid for Yahoo as the last, creaking gasp of a company out of ideas, running on fumes. How do we know this? Two words: online advertising.

Online advertising has become the last refuge, not of scoundrels, but of nitwits. If you don't have an idea for a product that offers something tangible for which people will pay real money, you create a website that generates revenue from advertising, from eyeballs. Why does this sound so familiar?

Generally speaking, the online advertising business model amounts to a fool's paradise, in which companies and investors assume they can continue to throw good money after bad to build products that will generate revenue without actually offering significant value.

That Microsoft is so desperate to build an advertising-driven revenue model, and that the company sees this business model as the future, might rightly be viewed as a sign of the apocalypse, if not for all of us, then for Microsoft itself.

Of course, the newspaper, magazine, network television, and radio businesses have all been built on advertising revenue. Google certainly makes ungodly piles of money from its text ads - and truth be told, they are so successful that the "nitwit" accolade can only be provisionally applied to them - although Google's success reinforces the aptness of this designation for those who think they can compete with them. The collapse of advertising-supported print businesses is, of course, also largely the result of Google's success (and Craig's List).

In its 2007 10-K, Google reported online advertising revenues of $16.41 billion, accounting for 99 percent of of its total revenue of $16.59 billion. Between 2005 and 2007, Google advertising revenue grew 171 percent. Interestingly, its much-touted Google Search Appliance did not generate material revenue of any sort.

And here is Microsoft. In its 2007 10-K, Microsoft reported online advertising revenues of $1.84 billion, representing growth since 2005 of only 43 percent. Online advertising represents only 3.5 percent of its total revenue in 2007 of $51 billion. Perhaps reflecting the lack of focus and coherence in its advertising strategy, the Microsoft 10-K makes it significantly more difficult to pull out and analyze advertising revenue numbers.

So we have a situation in which Google generates nearly 9 times more revenue from advertising and this revenue supports its entire business, where Microsoft online advertising supports only 3.5 percent of its business. Even though it is starting from a significantly larger base, Google's advertising revenue is growing more than 4 times faster than Microsoft's.

There is something weird going on here. At this point, Google is nothing more than an advertising company, arguably the most successful in history. The advertising revenue model drives all of its technology efforts.

By contrast, Microsoft is an operating system and software applications company that has never understood well the Internet, is late to the game of online advertising, and is outrageously deluded in its belief that it can ever compete with Google in the advertising market. Its desperation to enter this game is a bit odd, and only reinforces both its insecurity about the future of its core businesses and its incoherent grasp of the meaning of the Internet.

The reality, however, is that online advertising may not forever be the golden-egg-laying goose that Google's success might indicate. The market for online advertising is slowing, its promise in social networking sites seems overstated (to judge by current success), and economic cycles will influence the return on advertising investment and the willingness of businesses to spend more money on advertising (certainly enough to sustain Google's current rate of growth).

So here is a suggestion. We may be in the midst of an advertising "mania", rooted in the success of the brilliant birth of Google's text ads (which, frankly, I often prefer to normal, unpaid search results with which they are paired), but also fueled by the the takeoff of video on the Internet and the alleged promise of local advertising. These opportunities are real, but they are driven by the assumption that growth of Internet use will only continue to accelerate, that people will spend more of their time each day on the Web and that they will want to spend more of their money on purchases stimulated by Web (or phone) advertising.

As my son might say, "Dude, I don't see it happening."