Bubble 2.0

A lot of my favorite bloggers, especially Jeff Jarvis and John Battelle, are talking about Bubble v2.0. From Battelle's blog:

I am noticing an uptick in the kind of behavior that got us into trouble last time - specifically, spending untethered to value by companies with unproven models.

and from Jarvis:

Now venture over to Steve Rubel’s Micropersuasion, where he got much deserved linkage for worrying that too many 2.0 media efforts are being supported by the ad spending of fellow (unprofitable but VC-backed) web 2.0 companies. That kind of rob-Peter-to-pay-Peter spending is, indeed, what inflated the last bubble and Steve wonders whether it is happening again.

To me, Battelle started on the right track, but went off chasing an unrelated rabbit. Jarvis got closer in talking about depending on ad revenue. I think Bubble 2.0 is going to pop after the VC market realizes that their assumptions concerning the passive consumption of video online are overblown.

As I've talked about before, advertisers are salivating at the notion of placing their television commercials online. Online publishers and technology vendors are racing to develop the critical audience mass that will be needed such that passive online video can take up the mantle of television. Here's the problem...

A lot of advertisers have deluded themselves into thinking that people want to see their commercials. They see nothing wrong with plastering the Internet landscape with pre-roll and standalone online video. We know from past experience that people flee from environments that contain too much advertising, and they find ways to unbundle content and advertising despite the advertising industry's insistence on the two being taken as a package.

In summary, mistake one is thinking so many people will want to be entertained passively by online video. Mistake number two is believing they'll continue to gorge themselves on video clips after advertisers put a :15 or :30 preroll in front of each clip.

In the end, the audience numbers are going to be short of what prognosticators thought they would be. Ad revenues won't remain stable and will slide downward just like banner advertising did. And if we're really unlucky, we'll fail to learn from the past and we'll go through another "online advertising doesn't work" phase.

Look at all these video companies with business models that are based on huge growth in syndicated research that says the number of people viewing video online is growing by leaps and bounds. Unsustainable. Especially once advertisers have slapped pre-roll ads on everything.

An interesting wrinkle in this is YouTube's decision to avoid preroll and instead support itself with branded channels and what they call "participatory video ads." It's obvious to me that YouTube isn't going to contribute to the notion of companies shoveling TV commercials online, which is good. At least they understand the difference between active and passive entertainment, which is more than I can say for a lot of advertisers.

Hats off to YouTube for not folding like a bad poker hand to advertisers frantically waving their checkbooks. I hope they succeed. God knows they're going to take a lot of crap for developing non-standard ad concepts that don't easily lend themselves to shovelware. But that's a good thing. No good deed goes unpunished.