Pubmatic released a report covering the massive drop– Q408 average CPMs are at 26 cents.  Before folks claim economic peril, let’s consider a few other factors.  The mix of inventory for ad network has shifted dramatically to social, which has historically terrible CPMs.  From a weighted average perspective, it’s hard to say exactly the impact, but we know that 4 of the top 10 sites out there are now social and that social traffic recently passed adult as the largest category.  And the reason that social network have bad traffic is not necessarily because of a young demographic.  The more pages that users consume on a site, the lower the frequency they click on ads.   If heavy users are consuming 60 to 100 pages per day on a social network, as opposed to 6 to 10 pages on other sites, you cannot expect ad clicks to increase in linear proportion to pageviews.

What I’d like to see is gross earnings by site quarter over quarter.   Internet advertising is such that we have a growing audience of users consuming more pages per session– thus CTR will continue to slide.  And if revenue per click is constant, you can’t help but see eCPM (what publishers are earning per thousand impression) and CPMs slide.  My hunch is that gross earnings per site are flat, as opposed to down 50%.  Falling CPMs is both normal and good.

If Facebook were to charge their 50 million uniques just $2 a month for membership, they would instantly become a billion dollar business.  While you as a user might not like the idea of having to pay, given that you’ve invested so much time on the site and that your friends are there, would you really want to have to re-enter all your information somewhere else?

So the hypothetical question is– what percentage of Facebook users would just leave versus having to pay.  And what share of high school and college kids don’t have credit cards, which would then require a mobile payment gateway (stick it on your phone bill, just like ringtones).  We know that mobile payment is a highly viable option, given that I personally know affiliate marketers who have made tens of millions selling products euphemistically called “premium SMS” on Facebook and even MySpace.

Adult Friend Finder, who was recently bought by Playboy for $500MM, has just over 20 million monthly uniques, which is about half of Facebook’s traffic.  Thus, apples-to-apples, Facebook should be worth about a billion dollars, instead of the crazy $15BN figure that they try to get people to believe. However, it’s not an apples-to-apples comparison.  AFF is a pay site– they make money via recurring credit card transactions for memberships.  Their demographic is older and is willing to pay for services.  Facebook, on the other hand, is still primarly teenagers.  Thus, if you were to compare AFF (an adult dating site) and Facebook, then you might say that they’re similar in value.

Now consider that Adult Friend Finder filed for an IPO for $460MM two days ago.  They did this to avoid having to sell assets to make an upcoming debt payment. This is an act of desperation, from a company that has #1 market share, by far.  If the dominant player in a market cannot succeed, what does that say for Facebook or all the other guys who are spending money exuberantly, only to find that the destination they’re racing towards is not a pot of gold, but a graveyard.