Most online businesses today rely heavily on advertising revenue for sales and hopefully profits. This has worked with some companies such as Yahoo and possibly some others, but how will it work for the rest?

Right now, we are in a economic boom and expansion period for the internet. New companies are being created everyday at a faster rate than probably anytime in the past. These companies need to become know, so they advertise. This helps to keep the advertising rates higher because it creates more demand.

However, after this period is over and the growth slows, companies will have established customers and a brand names. Then, the need for advertising won't be as high because the names will be known. Also, investors will start becoming impatient in hopes of a profit and may encourage cost cutting in websites where advertising may be one of the cuts. So, if all of these banner ads are still out there and their is less demand, advertising rates will plummet and websites relying soley on advertising will find it increasingly difficult to make a profit.

Of course as the web evolves, mergers and aquisitions may take place and have two or three similiar websites merge into one and then their will be fewer ad banners and prices will not drop as much. This will help websites to make money.

Right now, it seems like many websites are being build on a business model that has a weak foundation. Advertising is probably one of the largest commodities around. Niche traffic from niche sites will possibly get higher advertising rates than others, but these niche sites are becoming fewer and fewer as more competitors come in to be in the same business. If a company wants to advertise, they have multiple outlets such as TV, paper publications such as newspapers, magazines, etc, radio, real estate ads (such as billboards, skyflyers, etc), direct marketing, product samples, publicity, and the web. Of all of these possibilities, it seems that advertising rates will remain low.

This makes it difficult to keep a website profitable. Sure, it may not cost much to keep the website up, but new content must be updated for most sites, which adds labor costs. These labor costs are the most expensive part of a website, but are absolutely necessary for most sites. And a bad thing about websites and labor costs is that, many websites are based in silicon valley where the labor costs are extremely high.

But perhaps I overlooked something. Adversising opportunities are limited to eyeballs and ears. People will only watch TV or web so many hours a day. Even though ads may be increasing, ad time will be limited to so many hours a day, mostly to the amount of freetime a person has. This may be good or bad for websites. If more people start spending their time online, which has been happening, they will have less time to look at other non-web ads, which will make web ads more valuable. The bad could happen with more and more websites being created.

So, the future remains uncertain and I beleive that without changing the supply of websites via mergers/aquisitions, web advertising may be an unprofitable business model.