This is the third and final segment of a recent interview I gave to Gerry Reynolds, a retail analyst, and which is published in Syntagma with permission. Read the other two parts here : #

Gerry : I’d like now to look in more detail at the essence of the business, its income, i.e. advertising. What are the main parameters of online advertising?

John : Online advertising is relatively new, so it still has more than a shade of the Wild West about it. It’s improving all the time, though, and growing very fast.

For small publishers, the breakthrough was Google’s Adsense, which is a text-based system aimed at generating clickthroughs, which in turn produce income linked to the market price of certain keywords sold by auction as “Adwords”. You can see examples of Adsense at the foot of each of the first three posts on any of our sites.

If that sounds complicated, it boils down to “pay-per-click” instead of pay-per-sale. The pay you get per click varies from a few cents to more than $10, depending on the product or service involved.

If you think of Adsense as plain old classified ads with an electronic counter attached, you’ll get the point.

Gerry : But Adsense is going out of favour now, isn’t it?

John : You do need high trafficked sites for it to work, which is why it’s the darling of the Google gamers, the SEO wizards who seed their sites with high-priced keywords to generate traffic and clickthroughs.

Most decent blogs will have traffic of between 10,000 and 50,000 page views a month. That’s not enough to make useful gains from Adsense. Significantly, though, it’s enough to generate hundreds of dollars a month from “text-link ads” which are paid for in advance by actual advertisers. There are now agencies which sell the ads for you and take a 50 percent cut for their pains.

Gerry : Does Syntagma use these agencies?

John : We do, but we also sell our own text-links off our inventory. They tend to give better value to the advertisers because we can be flexible with discounts, especially where a lot of space is available.

Gerry : So text links are the most important form of advertising for you?

John : In our first two years, they have been. The cumulative income from hundreds of text links over 40 to 50 sites, can be very impressive indeed, especially compared with affiliate shareouts, which depend on sales, and CPM ads which give small sums for each ad impression.

Gerry : What other systems have you tried?

John : I’ve tried them all. On high traffic sites, Adsense and affiliate links do well, because they are a numbers game. But the bulk of sites will be below, say, 100,000 page views a month. These need to be monetized in a different way to bring home the bacon. However, if these sites are in the right topic areas, they can generate good monthly incomes from text links.

Gerry : What are the right topic areas?

John : Click through our inventory contents list in the sidebar of Syntagma and you’ll see those that sell out on text link ads positioned below the header.

Gerry : So anyone can do this?

John : In theory, but not quite. Many “blog” networks have closed because the owners didn’t have the stamina to see the job through. Syntagma has a good reputation in the space, which we’ve earned over two years, and is seen as a mature player. That attracts advertisers to us.

In our first year, income was sparse and I funded the operation from my credit card. In the second year, when I had learned the lessons of profilgacy, oneupmanship and other money-draining practices, I slimmed the whole shebang down to an optimum size and reach, which now makes money.

I don’t want to beat my own drum, but it does take tenacity and a great deal of shrewdness to stay in the game when you’re losing funds every day. The secret is to stay in the mainstream in terms of market niches, but to do it differently from everybody else, so you stay ahead of the crowd.

Gerry : You don’t mind giving your secrets away?

John : I’m always glad to help anyone who’s starting out or who is currently not succeeding. There’s enough money in online business for everyone who wants to claim it. Each success story expands the envelope. It’s not a finite pot. It’s a very dynamic marketplace, and we’re all pioneers here.

Gerry : What are the other forms of advertising that you may use in your third year?

John : I’m always experimenting, sometimes below the radar and on sites not part of our list.

Sponsorship of sites by substantial corporations is a possibility, and I’ve had talks with a few such players. Also, Google is developing an ad network with the aim of filling neglected inventory all around the internet with their ads. It’s a great concept, especially if it gets away from the necessity of hosting dedicated ad serving software, which is a nightmare for relatively small operations. That’s the Next Big Thing in the space, and all the other majors are following suit right now.

Gerry : You seem to have an aversion to spending one penny more than you have to on anything.

John : I operate a “blood from stone” policy. In a low margin business, you need to find the sweet spot where profits are generated from minimum costs. So far, I’ve been successful in this. I don’t intend to overreach the limits imposed by basic cash-flow techniques, nor make assumptions that I can’t nail down.

Syntagma’s motto is Dr Johnson’s phrase : “Example is more efficacious than precept”. Which can be translated as “successful actions speak louder than words”, or “A warehouse full of bacon is a better investment than a forestful of wild boar”.

Gerry : What about subscription models of funding?

John : They have been tried, mostly on crack information sites, and usually with disastrous results. The New York Times is coming off a part-sub model right now, and so are many other newspaper titles.

People expect their online experience to be free, for the simple reason that when they click away from a page there’s nothing left, unlike with a newspaper or magazine. It’s fairly simple psychology. That’s why we sell the fleeting use of their eyeballs. There’s nothing else to sell online that has real value.

Gerry : I love that, “the fleeting use of their eyeballs”. Are people aware of what you’re doing to them?

John : Good God, no. Everyone’s very protective of their eyeballs. If they thought we were renting them out, they’d shoot us.

Gerry : And so on to year three.

John : From October 20, yes.

Gerry : Is it going to be a good ‘un?

John : The best so far, undoubtedly, but the words “chickens” and “hatched” loom large in my consciousness.

Gerry : As ever!

John : As ever and a day.

This is another part of an interview I gave recently to Gerry Reynolds, retail analyst. The first part was published here yesterday. #

Gerry : Looking at the network in more detail, how did you get into online publishing in the first place?

John : About four years ago I started experimenting online. I had a free Blogger.com blog called, appropriately enough, Syntagma, in which I wrote anything that came into my head. Like most play blogs it jumped around all over the place. But it gave me a grounding in HTML and paved the way for what has happened since.

As an additional commercial project, I designed a static website, The Dial, in a magazine format, which attempted to make money out of books by direct sales. It did, but fell well short of challenging Amazon.

Then there was a forum about writing and editing as careers, with a monthly magazine called, Serendipity. Lots of work but zero financial returns from that one, although it became the basis for my subsequent educational publishing business.

Gerry : So you were basically messing around at that stage?

John : Yes, but building foundations sounds much better.

I wanted to discover if a full-time professional writer and journalist could make a living online. It’s taken two years, but now I know the answer — yes.

Gerry : But not quite in the way you do in the print world.

John : No, it’s a very different medium and requires far more technical knowledge about the internet and how it works. It’s a real nightmare at first, because you haven’t got a clue what you, or anyone else, is doing. You just have to learn by trial and error, and that takes time. After four years at it, I’m still learning — mainly because the technical side moves on and you have too keep up or be left behind.

Gerry : Would you recommend writers and publishers to come online?

John : I think they have to. You can’t avoid it now with the amount of convergence going on. Long pieces will always have a primary place in print because readers find books and magazines so convenient, but rapidly updating news has already moved online in ways that would astonish older journalists and publishers. Tech news is also embedded in websites now with newer tools, like Techmeme, sorting it all out according to relevance. So it’s a kind of massive, distributed magazine.

Gerry : But the money angle is crucial.

John : For a professional it has to be. If a piece of writing makes money for the author, it justifies the writing of it, partly because authors need the cash, but also because it represents a vote of acceptance from the reading public. Nothing improves an author’s mood more than brisk sales for their work. Don’t ever fall into the high-minded trap that writing for an undefined audience where money doesn’t matter is a “purer form of art”. It’s a soul-destroying exercise and usually masks the fact that the writer is not very good.

Gerry : What are the economics of an online income stream?

John : My bookselling days taught me never to sell directly from a website. Books are heavy to ship, and margins are terrible. So, avoid selling physical objects online, unless you have a successful bricks and mortar business which will underpin it. In that case, online sales supplement an already solvent enterprise.

Digital content networks rely almost exclusively on advertising for revenue, so that’s another technical hornet’s nest to get your head around.

I started experimenting with Google’s epoch-making Adsense system when I had my Blogger.com blog. Waiting to reach the magic $100 mark — the point at which the first cheque arrives — proved to be a minor eternity. Lately, though, just as I was about to give up on Adsense, the number of clicks has been picking up rapidly based on a few high-traffic sites. Adsense is now a valuable part of the overall mix.

Gerry : So you’re really an ad-space salesman?

John : Oh, yes, that’s what it’s basically about. The content side is there as a hook to hang the ads from, so you might think it’s less important. As a writer and publisher, though, I don’t see it that way, and I’ve always tried to give our advertisers value for money in terms of quality content.

Gerry : Therefore, you are writer, publisher, ad salesman, internet technologist …

John : Photographer, as well as bookkeeper, accountant (although these tasks are now outsourced to a professional) , entrepreneur, teamaker and general dogsbody. A bit like every other small business owner really.

Gerry : But with many tough technical skills to master and a great deal of flair needed?

John : You flatter me, Gerry. But I won’t disagree.

Gerry : Let’s look at the size of the business now. Will it expand from here?

John : I hope so, but in an organic way from the inside out, rather than bolting other bits on to the outside.

Gerry : No acquisitions then?

John : Not unless they are simple absorptions of complementary activities. Over-complication is the bane of the business world. Companies grow to a size where they are no longer responsive to market fluctuations. Then they have to demerge parts of the business to survive.

For me, Syntagma still has the feel of a hobby project. I still enjoy doing it and the business aspects don’t overwhelm it. If I don’t like doing something, I’ll drop it, or outsource it. But all expansion means shifting from specialist to generalist, and that can’t be changed.

Gerry : You’re not in a hurry to launch a Syntagma IPO, then?

John : Good God, no. Why do people do that? Prestige, big job titles, vanity, more money than they can handle. The fate of Icarus is always in the back of my mind.

Gerry : Would you say that you’ve reached your goals now?

John : If someone had told me I would be taking down a six-figure dollar income within a fairly short time, I wouldn’t have believed them. My original objective was to sell the business for a tidy lump sum and start again. I never thought it would make much of an income because all revenue was being pushed into expansion.

The epiphany was that there is an optimum size for a single-owner network, and that you can earn a good salary from it. The surprise was that you can’t sell networks now for $30million. You win some, you lose some.

The real decisive moment though, was settling for that. Why chase chimeras, when you can be content with what you’ve got?

Gerry : How is that resolved in practice?

John : If you set no upper limits, you’re really at the mercy of events. It’s no good having a $10m business if your costs are $11m. Mr Micawber defined that problem 150 years ago.

The trick is to set an upper boundary that gives you the best split between receipts and obligations, building in the vagaries of the tax system, of course, and depending on the amount of effort you can comfortably provide. Everyone will reach a different conclusion, but it has to be within your comfort zone. You are, after all, in this for the long haul.

Gerry : So you’ll not be selling the business?

John : I’ve personalized the business so much, it’s hard to see who would buy it now. But the idea of creating an empty shell of a company, with no branding, so that anyone can buy it, just isn’t how I do things. I’ve always preferred chocolates to boxes.

Gerry : Cheers, John.

Read Part 3 of this intrview.