Internet Outsider

As Goes the Housing Market, So Goes Advertising

Well, okay, that's a stretch, but the link between the prognosis for the housing market and the economy seems strong (as goes housing, so goes the economy), and when the economy stumbles, advertising is often the first expense to get cut.

In 2000, I shudder to recall, advertising-driven companies (on and offline) were the first to crater, and they were followed shortly thereafter by all manner of other industries, like dominoes.  Some will undoubtedly argue that, even if there is a recession, Google and Yahoo will be fine, because search and other forms of pay-per-event advertising have a crystal clear ROI.  These bulls will point to the success of GoTo (Overture/Yahoo Search) during the last recession as evidence: While the rest of the online world as we knew it was ending, GoTo grew like a weed. 

And to some extent, this is true.  Search should weather an economic storm better than other forms of advertising, because even penny-pinched advertisers will know where each search dollar is going.  But weathering the storm is different than being "fine", and some Google and Yahoo customers will cut back (if only because their customers are cutting back).  Also, when GoTo was powering through the last recession, search was a cute little $100 million business.  It is now approaching a $10 billion business, and, as such, is far more exposed to the vicissitudes of the economy at large. 

So as the housing market continues to weaken, do not make the mistake of thinking that this is an isolated micro-event that is irrelevant to the big boys of online advertising.  It isn't, and like the rest of us, Google and Yahoo will probably feel the pain.

Recession to Hit Net Cos? Don't Bother Asking

Is a recession on the horizon?  Will it hit the Internet companies? 

The answer to the second question, at least, is almost certainly "yes."  Back when Internet advertising and commerce spending was a fraction of a percent of the total economy (late '90s), one could argue that the industry was growing so quickly that it would power through any broader economic slowdown.  Now, however, online advertising and commerce spending has reached a point where its fortunes are linked more closely to the general economic tide, so if the economy slows, brace for impact. (Which isn't to say the industry won't continue to grow faster than the rest of the economy--it probably will).

The answer to the first question, unfortunately--Will there be a recession?--is "No one knows, so don't bother asking."  As the NYT observed this morning, economists not only show no ability to predict recessions, they often can't even tell they are in them until after the fact (Back in 2001, when Greenspan was arguing that a recession could be avoided, the economy was already in one).  One factor that helped investors, analysts, and executives blow the 2000 turn, in fact, was that nearly every major economist on the planet was expecting the nirvana of the "New Economy" to continue for the foreseeable future.  And, then, whammo, the world ended.

Everything's obvious in hindsight, so when the next recession finally arrives, commentators will make hay and friends by pointing out the obvious signs that overpaid experts missed and bemoaning their apparent incompetence.  But ask these Monday morning quarterbacks what the economy will do next, and they'll suddenly hem and haw.  Because it turns out that there is no way for anyone to reliably predict what the economy is going to do over short-term timeframes, expert or no.  The wise people just don't bother asking.