The Instapundit, Donald Sensing and others have done sums based on the NY Times's peculiar purchase of About.com that look rather stratospheric. Tim Worstall does some number crunching to come up with another valuation. Tim's numbers are interesting not so much because of the top-line valuation but from the perspective of the gross profit margins and cash flow. Tim estimates that the Instapundit has annual fixed expenses (COGS if you like) of a maximum of $5000. That number is probably overgenerous and certainly, since the Instapundit is about the biggest blog there is, about the maximum possible outlay that a blog could have - an analysis of former bigshot blogger Andrew Sullivan indicated annual bandwidth costs for his site at a tenth of that ($500/year) for example. I would guess that the average blog has COGS of about $5-$10/month (call it $100/year) tops.
Now this is where the salivating margins come in. Unless you do the blog sufficiently much that you need to take a salary for doing it there are no other costs and all revenue above that needed to pay for the site ($100/year) is pure profit. A quick look at blogads indictaes that the lowball monthly rate is something like $20 with more usual amounts being more like $50 or so - it is almost impossible to get similar stats out of google's adsense but it looks like $20/month is also a lowend amount for a reasonably popular website. Assuming that a blog has both adsense and blogads then after about three months he will have cleared the years expenses even for a really low end site. This makes the minimum gross margin 75%. Of course if you actually hit the big time and start charging say $100/blogad/month then that gross margin goes up on the 90% range and the gods of the blogosphere such as Instapundit will see margins over 97%. More to the point that gross margin is also the net margin - there are no other expenses so a blogger's balance sheet makes the average Intellectual Property company look like a low margin high cost business.
There is of course one big point here which is that I have assumed no salary costs. Once one take a salary all those nice margins start looking rather ugly since - again unless one is fantastically successful - the salary is likely to be 100% of what is left over after the bandwidth costs and even then it's likely to be rather low. Consider a mid to high end blogger such as Donald Sensing, he offers a number of ads at $125 a month and generally seems to have one or two taken. If he always fills one ad at $125 a month then he makes $1500/year, even if he managed to sell ads on a weekly basis (higher rate) and consistently had four concurrently active then that $1500 would only turn into $8000+. Either way that isn't going to pay much of a salary, but whether it is $1500 or $8000 it does make a nice addition to one's regular income for the expense of an hour or so a day. Although the hourly rate is probably below minimum wage the point is that one is being paid to do something that one would do anyway thus the benefit for the blogger is that one is paid to do one's hobby.
So where is and isn't the big money in blogs?
The money, as any dotcom investor should have realised, is in the provider of blogging tools. Google and the Pressflex, the company behind blogads, are the obvious picks. Yahoo could be another since, although it doesn't directly do blogs (yet) it does do the gazillions of geocities websites and yahoogroups mailing lists which frequently resemble or compete with blogs. About.com is not one that I would have picked myself since it seems to be both content provider and advertiser.
Of course the brief look at blog margins are rather depressing for people ties to traditional publishing models. The cost to print a regular newspaper or magazine (forget the cost of the content - journalism) is thousands of dollars an issue, which explains why newspapers have many many adverts and that you can't advertise in them for $40/month or even $40/day except, if lucky, hidden away amongst 500 others in a classified section. In terms of readership, taking out a blogad or a google adsense advertisement at perhaps $1000/month spread over many blogs or sites will get you not only more eyeballs but also, if done correctly, more revenue because the eyeballs you get are likely to be interested in the product you are offering.
The rate charged per eyeball is interesting. Take Tim Worstall as an example, with around 1500 visitors per day and blogad spots at $20/month, the cost per (pair of) eyeballs is about 0.04cents. Instapundit - to go to the top of the blog world - gets over 100 times as much traffic as Tim but charges $1000/month for his regular slots (but more for the top two) so the rate per eyeball is not noticeably different. Most newspapers seem to be remarkably coy about their ad rates for display ads but $20 would buy a couple of lines of classified ad appearing once in most papers. The Fresno Bee (picked kind of at random thanks to a google hit) reports that it is read by over 400,000 people each day or 300 times as many people as read Tim's blog, thus in order to have a similar cost ad/eyeball the monthly rate for a display ad in the Fresno Bee needs to be $6000. Although the Bee doesn't say what it's actual rate is I suspect the $6000 is about what it would charge for a single day ad not a month's worth which indicates that the cost per eyeball at a print newspaper is some 30 times greater. This is an order of magnitude difference - it doesn't really matter whether we are looking at the NY Times, a specialist monthly trade magazine or a provincial newspaper all of them have to have many more advertisements priced much higher than a blog in terms of cost / eyeball in order to break even.
For advertisers with a choice between bloggers and traditional print as a medium to get their message across the blog side wins hands down. I suspect that as these numbers begin to sink in we'll see many more ads on blogs at higher rates than present and that may then make more bloggers able to drop the daytime job. Right now, if I could figure a way to buy blogad futures I would, the rates for most blogads has to go up, and will do once mainstream advertisers figure out these costs.
(Disclosure - in case you hadn't noticed this blog has no ads and not tip jar and hence no revenue, but it is also free to run because it is hosted by a friend)