Will Your Partners Really Scale Their Web Business?

Will Your Partners Really Scale Their Web BusinessThe money is clearly moving online. Big advertisers like Facebook and Google are seeing their profits rise. But what about you? Are you getting your fair or unfair share? And will your partners really scale their web business?

There was an interesting article in yesterday’s Wall Street Journal on the myriad of middlemen who have gone public but are yet to see profitability. Rocket Fuel, YuMe, Rubicon Project and Millennial Media are all mentioned as companies that are seeing revenue grow, with losses growing at the same time.

So where are the profits flowing?

Executives are sharing the “growth cures all ills long-term” message, and that investment today makes the company massively profitable in the future. Investors are having a mixed reaction, and as a result these companies have seen share prices decline at double-digit rates. Some have seen their stock price halved since the IPO.

But can all of these companies get to scale?

A report from last month showed that in the US and Canada, Facebook’s best market, they generate $5.79 per user. (Worldwide the total is $2.06, but some of that can be attributed to being early in the markets.) So far, so good.

However, if you look at the amount of time the average Facebook user is online (7 hours per month was the 2012 number, I am struggling to find a more recent measurement, except to say I sense it is higher), that says 21 hours of viewing generates $5.79 of revenue – or if one assumes an hour a day per quarter, that’s $0.27 per visit.

Using that metric, success can ONLY come through a massive number of users. Even at $0.50 a user visit, it takes a lot of users to either build a large company, or justify the valuations of these companies. Is it any wonder Twitter was under attack for slowing user growth?

So back to the others, those companies that get a share of each piece of the revenue. If Facebook generates $0.27, and an online ad company keeps 30% (a high number), they have to really scale. On one hand it is slightly easier, accumulating lots of smaller sites to get volume, but you have to add up a lot of blogs to get to Facebook numbers. Scale thrills, but can also kill.

When you get ready to place your investment bets, think about scale first.

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