TACODA Founder Dave Morgan on What’s Next in Online Advertising

Dave Morgan knows a thing or two about the online advertising market. In 2001, Morgan founded TACODA Systems, whose behavioral marketing technology not only attracted $32 million in venture financing but eventually the attention of America Online, which paid $275 million for it in 2007. Meanwhile, though Morgan’s first online ad company, Real Media, was acquired in 2000 for the $30 million it had raised from investors, the company it helped create, 24/7 Real Media, was acquired by WPP Group for $650 million in 2007.

Morgan, who’s based in New York, isn’t discussing his newest venture yet. “I’ve found in startups, you change your mind a bunch of times before you find the right thing, and if you announce too early, then you’re defending every change.”

Calling yesterday afternoon from Ixtapa, Mexico, however, he did share his thoughts on what the recession will mean for online advertising this year — and what entrepreneurs should do about it.

A couple of months ago, people were anticipating that online ad revenue in 2009 would be flat. Was that too sanguine?

My view is that the consequences of this recession are going to be more dramatic than people think, that we’re at the front end of this. The lead pins were the financial services and automotive industries. Now we’re seeing the retail industry get hit. We haven’t seen the recession hit manufacturing but if people are buying less, we’ll see that soon, too.

What does that mean for advertising?

It will also suffer much more than people think. Everyone will basically shut [down projects] in the first quarter, waiting to see what happens. Then, they’ll likely find out it’s worse than we thought. I don’t believe it will be a flat year. Advertising is too closely tied to GDP, and GDP is down; advertising is always down a factor against that.

There is a wild card in all of this, though.

Which is?

There’s always a lag between when consumers shift to new media platforms and advertisers actually start spending money on them, because like other kinds of businesses, you tend to focus first on what’s worked for you in the past. Also, in many large businesses, you aren’t rewarded for risk. It’s only as it becomes more self-evident how valuable those new media become that advertiser behavior changes.

So the wild card is whether the downturn gives executives the chance to take radically different steps. Business as usual isn’t an option when thousands of nationally based stores are going out of business and the major automakers are on the verge of bankruptcy. Really bad markets provide really good cover for risky decisions.

Which online advertising technologies will hold up the best one way or the other?
I think search will do well, because it’s a pure direct response business and if you look at the ad recession of 2001, advertising was down but direct response stayed flat. So very direct-response-oriented businesses like search and performance-oriented online advertising like be fine. I think search will actually be up and that some parts of display will be up.

I also think that for many advertisers, Web video is seen as not that much different than television, and Nielsen [Online] recently released numbers suggesting that consumption of Web video is way up [roughly 40 percent, year over year]. So that’s an area to look at. There, we’ll see some growth, even if we see significant decline in the overall market.

Which sites do you think will fare the best from an advertising standpoint?

I think premium branded content Web sites like NYTimes.com or Slate or Conde Net will probably be okay. The business model of their parents isn’t doing well; that’s the challenge. I think the impact of this recession on traditional mediums will be horrific, actually. For example, I think we’ll see quite a number of daily newspapers stop printing newspapers this year, and I don’t mean a couple but dozens and dozens and maybe even hundreds. The economics just don’t work.

Let’s end this discussion on a brighter note: what’s one area that budding ad entrepreneurs have perhaps overlooked?

To me, next-generation television is the most promising area. Consider that we’re seeing more and more a coming together of the sight, sound and motion of television with Internet-like technologies. At the same time, today, Web sites can deliver ads to every different browser on their site. That’s a very powerful combination. We don’t have that on television, but television is still very relevant. In fact, overall consumption of television is up — just slightly, but it’s up. And that doesn’t count usage of TV for video games, which bumps up device use dramatically. So I think the next big thing is combining TV with a lot of the technologies and techniques of the Internet. That’s the area entrepreneurs should be looking at. There’s lot of growth online, but when you’re talking about television, you’re talking about a $65 billion year ad market.