Q&A with John Durham: Online Advertising in a Worsening Economy

With Washington bickering over a bailout package, the largest bank seizure in history happening, and general unease in the country about what comes next, I wondered how online advertising — on which so many Valley companies are now depending — might be impacted.

For more insight, I phoned John Durham, formerly head of business development for marketing powerhouse Carat North America and today cofounder of Catalyst:SF, a consultancy brought into startups through their venture capital backers, including Redpoint Ventures, Sequoia Capital, and Battery Ventures. “We sort of drop in an act as chief marketing officer until the startup launches,” he says.

Durham, who also teaches advertising to MBA students in San Francisco, told me that he still believes the future of online ad spending remains bright. He also suggested that plenty of startups will start to feel walloped soon.

Obviously, ad spending — of all types – depends on consumer spending, but I don’t see that picking up anytime soon. In fact, it’s likely to go into a deep freeze. So what does that mean for Internet advertising?

Well, more and more people are starting to embrace digital advertising, and I actually think it will continue to grow. I don’t think the growth will be crazy, because advertisers are getting much smarter about ensuring that their clients deliver really rich Web experiences. But then again, older brands that haven’t embraced digital are beginning to do that, so I think we’re in a good time.

Really? You don’t think the advertising budgets are going to get slashed after the carnage of the past couple of weeks?

I think smart marketers realize that now is the time they can get good inventory without having to spend Super Bowl amounts of money. That’s what makes our business fun. I’m not going to say that it’s going to be really great right now, but digital advertising works. It has great payback because people are using the Web in all parts of their lives, and advertisers follow the herd, whether it’s mobile or enhanced video or on television.

But surely advertisers are pulling back.

Sure, it’s tough, I just came back from New York Adweek, and people are nervous. But they are dropping print. They’re being smarter about TV, which is still the most powerful medium. They’re focusing more on digital out of the home, where you see video screens in Starbucks and in airports and lounges.

And what about online?
Search is still the gateway for a lot of money, then display, then advertising dollars move into other forms of advertising. In fact, people can wear out advertisers with the new ideas that they’re always being presented.

Who’s making big bucks aside from Google?

A lot of publishers at very high end levels. Yahoo continues to make money — maybe not to make Wall Street happy but an amount that would make a lot of people happy. Talking Lemon, Glam and other vertical [ad networks] are doing really well and satisfying niche customer bases.

I read in Valleywag today that Glam is undergoing layoffs right now.

I don’t ascribe reorganizations to trouble. Advertisers have liked them and embraced them. That said, just because companies raise all this money, you still have to put a smart product out there so that advertisers can trust that you have customers.

What are some especially smart products out there, in your view?
Searchme is a very cool company. It’s just incredibly intuitive; check it out. I mean you’ll say, holy J___s, it’s that cool. And I’m not an investor in the company or anything.

That’s some accolade, but let’s get back to my doom and gloom angle. Which types of startups will suffer first from a downturn in ad spending online?

Well, I don’t think people will buy five deep in a category. They might buy three deep. It’s almost like a horse race; advertisers will begin to bet on the top three horses rather than spread their bets. Basically, there aren’t going to a be a lot of big test budgets going forward. Last year, advertisers might have tried out three or four new ideas. Now, they’ll test one or two, which will have a ripple effect. They’ll want to run their premium placements with premium publishers, i.e., ‘I don’t want to try anything until I can get back on ESPN.com.’

As far as which areas suffer first, real estate and financial advertising is really going to slow down, I don’t think there’s any question. I mean, JP Morgan is buying Washington Mutual, which is a huge advertiser, across TV, online, direct mail. You have to look at what impact that merger alone will have, then look across the landscape. When companies merge into others, people look first at the human capital, then they look at marketing efficiencies. If you’re duplicating your efforts, those efforts get reduced.

General Motors is another one. It just issued a directive that their advertising agency clients reduce costs by something like 15 to 20 percent, and GM is one of the country’s biggest advertisers. That means everyone is going to get hit.

Obviously, no one anticipated quite the mess that we’re in right now, but what are  some of the mistakes that VCs have made in evaluating online advertising startups up to this point?

First, advertising isn’t the panacea for every single Web site. I also think everybody thinks that if they put a banner on a page, advertisers are going to come. But as a marketer, I know that that unless I’m visiting a Web site that I like and where I want to be, advertisers won’t do well there, either.

I think the really good VCs think strategically about what’s the best way to make people feel good about my property, so that advertisers will want to be there, too. But generally, I don’t think venture people respect the ad business. They think we just spend money.