History, Recessions, and Innovation

Auren Hoffman wrote an insightful blog post this weekend about why bad economic times are good for innovation and good for Internet advertising.

I think both those things have been true. Startups have to prove their mettle during hard times and the Internet companies and trends that came out of the past downturn were truly innovative. Search advertising also emerged strong because it really was the direct marketing of the Internet. It was great value for the money and it worked exactly when advertisers needed it most, making them loyal customers.

But here’s the question. That was true in the past, but what does it take to make that true in the future? Search advertising is a big market, but is it where innovation and massive growth will happen after the downturn is over? There’s a good reason to ask these questions. Search advertising’s rate of growth might be suffering from people becoming used to it and not clicking as much, as Catherine Holahan argues.

So that leaves us with trying to figure out new ad models during a downturn. The ones that people talk about the most are engagement and cost per action. (Where advertisers only pay when they get results like someone signing up for an email list.)

The downturn could be good because it forces the companies to get to work on these new models. But if you look back, you see that search advertising was already more established when the downturn hit than these new programs are, especially engagement. Overture, which pioneered the model, was launched in 1998. By the time hard times hit in 2001, the only part that needed work was selling the model to advertisers. Engagement, which is particularly important to social media, doesn’t seem anywhere near that advanced.

So it could be that the timing on the downturn isn’t as good for the development of this new kind of advertising.

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