Saturday, March 11, 2006

Problems With Advertisement As A Revenue Model

Sometime back (Last Saturday to be more specific) I gave a talk at BarCamp Delhi about “Web 2.0 & Power of Default “. I discussed how customer accepts what is offered to them and live with sub optimal solutions. I explained how this tendency of default is spilling over to Internet applications also.

Audience response was good (Well, They were listening ). Some folks asked questions pertaining to the default factor & its implications. But strangely most of the Questions come out from the slide where I mentioned, “Web 2.0 Requires a Revenue stream other than Advertisement “.
Well honestly I haven’t prepared much about that point . Much of the answers I gave were more of the gut reactions & reflexes that were not backed by “coherent “ logic.

So here I will attempt to bring some coherence in my arguments about why I am not comfortable with the idea of having Advertisement as the [only] source of revenue.

What Are Advertisements? : A Tool to Grab Your Attention

Ever heard of the term “Attention Economy”? No? Ask any veteran of Advertisement world. This is a pillar of Advertisement (Now onward “Advr.”) world.

Attention Economy is the whole cartel of Advr. Folks trying to get your eyeball, you’re mindsapce, your attention and getting paid for it. They put up an Advr. , You look at it; if it is good you talk about it to your friends and somewhere down the line this convert/translate in to you or your friends purchasing the stuff. It’s a chain reaction for which you are the starting point .So it all depends how good was the Advr in getting your attention.

In narrow sense of word the parameter for measuring the efficiency /Quality/Effective ness of an Advr is, it’s ability of distracting us from what we are currently doing and make us pay attention to the product it is pitching.

This makes Advr. Unsuitable for some type of applications. It’s ok to look at an Advr while you are relaxed, or not doing something, which require a focus attention of yours. In short if your intended application or website offer a service which can be accessed in a “Sit–Back & Relaxed “ mode (say photo sharing, social networking, chatting and even Blogging J) than perhaps having a few Advr link on the side bar is not a bad idea.

But the moment you want to do something that require you to “Sit-Up & Stay Focused “ than most of the folks don’t like the idea of having an intrusion of Advr. That partly explains the reason why out of so many companies in Web2.0 space ,only is not having a Adv supported business model .Because the nature of application require them to do so. and 37signals is having a substantial user base that actually pay for the service.

There is one more and very interesting aspect of this story,

During the debate at BarCamp someone from the audience said
I won’t mind having a few Ad-Sense hyperlink in the side bar if that can enable the service provider to give me the service for free. Its perfectly fine with me.”

What that gentleman was trying to say was that he would put up with the annoyance of having Ad Sense link, as long as application is free. He will simply ignore them. He will not click on them .its fine with him

Yes Sir! It is absolutely fine with you. And you are not alone, World is full of people like you. But if I am a small time service provider, it is not fine with me. If you come to my site and don’t contribute to revenue even after a long time of steady usage of my service than I will be in trouble.

If you look at the ratio of “Page View “ and “Advr Click” for Big Portals, you will see the truth. God save you if you are a small time operator for a niche segments.

Problem is compounded with the rise of “contextual, Text based, Advr service” like Google’s Ad -Sense, which pay you only for clicks. Now than you can’t even get the benefits of “Eye Ball Time” of those “Banner-Ads” On Which a user might never click but which can generate /convert in to a sale in offline world.

Say an Advr of Pepsi or “All Clear Clinic” .

So if you want to make a “Sit Up “ type of application what are we left with?

a) Simply make some thing people will pay for. J
b) Keep a basic version for free but not “Advr Free” so that user can try it
c) Give a lot of feature in Paid & “Advr Free” Version.
d) Let both Free & Paid Community interact with each other.
e) Keep your subscription fee very low.
f) You can even think of starting a sort of referral scheme which award you a certain point on every joining and after amassing a certain numbers of point you are automatically upgraded to a Free “Paid Version”.

OR Else

You can keep giving every thing for free and hope that one Fine Day Google, Yahoo, EBAY & MSN will try to out bid each other to acquire you. Good Luck.

Problem With Portals:

You can argue that Companies (Read : Portals ) are making Money this way. Isn’t it? Doesn’t it validate the model?

Yes it does. But only partially, only for some players, some very big player .Big players are hard to replicate. There can only be so many Yahoo and MSN. While making plans for your businessbig portal are not good data points.

Investors looked at Yahoo's earnings and said to themselves, here is proof that Internet companies can make money. So they invested in new startups that promised to be the next Yahoo. And as soon as these startups got the money, what did they do with it? Buy Millions of dollars worth of Advertisings on Yahoo to promote their brand. Result: a capital investment in a startup this quarter shows up as Yahoo earnings next quarter-- stimulating another round of investments in startups.”
Paul Graham in “What Bubble Got Right?”

Now be honest to your self and calculate how much chance does your company have to be next yahoo before you burn all your cash? If you think it has a fair amount of chance to do so, than you might as well take yahoo as a data point.

Problem with portal model is that aiming to be a horizontal portal like Yahoo, MSN is like competing with Boeing & Airbus in bidding for a 100 Year Lease of all aircraft of Lufthansa. There is very little room.

There is a time for every type of technology & every type of venture. If you are there at that time you can click. Not after it, Nor before it. Portal was the model of Web 1.0 world now have a good number of portal.

Similarly Blogging might be the hottest Application today, but it is not a brainchild of Payra Labs alone. Long before Web 2.0 and all this hype, a company called PointCast came up with the idea. It was way ahead of its time.

So think about it what type of application you have? Can you replicate the Portal phenomena? & Can you make Portals of World Buy you? And can you do all of these before you run out of cash. And deiced.


I have not suggested any solution to the revenue problem here. I have tried to provide a framework for discussion. I am looking for an answer myself because as an aspiring entrepreneur this is the first question VCs will ask me.

This makes me wonder why this Advr mindset is still prevailing and why people still see it as the only source of revenue on net. After all 1999 is not that far in memory lane?

I think part of the reason lies in the history of Advr & Internet it self.

From the inception of the concept of Advr. It has been very hard to measure “Return On Investment “(ROI) from the capital expense on Advr. (I.e.: Can you tell how many people drink Pepsi because they saw an Advr of Pepsi in Playboy or Times or WSJ?) .

Internet is the only medium where this problem is solved to a certain extent. This is what Advr World has learned from Internet.

What has Internet learned from Advr World?

Well if you can get enough folks to Advertise on your publication you can sell your newspaper on a cost that is absurdly lower than the expense & still you can make a lot of money.

But ironically while most of the newspaper charge you some thing? Geeks have taken this to next level and they are giving their newspaper for free.

Looking forward to you comments!!

1 comment:

Sunil said...

I guess its not about Web 1.0 or 2.0 in the sense of having advertising as a revenue model. From the advent of the internet, businesses have made services free in order to grab userbase and an inherent mindset has set that service has to be free. Would an average user like to pay for basic services such as email?

From this I remember an old incident, cinemas when they started they used to pay people for watching movies and now the same people charge money.

In the dot-com boom, there were companies who paid users for using services but now its just free. Time will tell if the basic services get charged or there can be something apart from contextual advertising that has yet to take the internet by storm and solve all business needs for the niche players.