I was reading an article about Google and the writer was fawning over how wonderful the Google business model is and how fantastic the whole advertising supported world is and how great the Google boys look … and I almost threw up.
The problem with the Internet is that people still expect things for free (see the open source software, advertising supported games, etc, movements for examples of this), and the problem with this notion is that you can’t support innovation in a capitalistic society by giving away things for free.
This post deals with the advertising sponsored world and movement toward advertising based solutions as a whole while providing some insight into individual business models.
Now there is nothing wrong with expecting things for free, and in fact to get a viral customer adoption curve, setting your price point at $0 is often a very attractive offer to counteract initial customer inertia. Look at the initial foray into mass adopted television. You and I both know that TV isn’t free: it’s paid for by the increased product costs cause by advertising expenditures. However, free and advertising supported is exactly how the first networks got their foothold and customer base.
However, after a while, the folks who consume entertainment started getting tired of all the advertising and started moving to the subscriber cable networks where part of the draw was the lack of advertising. Just look at the Tivo phenomenon. Viewers are skipping commercials as quickly as they can press the fast forward button. In fact, I personally won’t watch anything not recorded on Tivo because I’ve become so accustomed to cutting out the commercials.
With the above musing as a foundation, it is apparent that the problem is that advertising is an externality: a decision made by one group imposed upon another. And if you think about it, advertising really should not exist. Basically advertising is a transfer payment made by the consumer through the producer (in terms of higher product costs) to the marketing and aggregation/distribution channel for access to paying customers, supported by non-paying customers (people who don't buy the product).
If advertising is truly an externality and something that very, very few people want, then how can a company like Google make so much profit by being the delivery point for ads? Can advertising supported services (software, search, content) survive for long in the hyperactive world of the internet? Or will the natural progression towards value-added services quickly swallow this free-tv model? Can-we / should-we get rid of advertising?
I believe the solution is to look beyond advertising supported models and create business models that charge fees for the value they add and not because they can impose an advertising externality.
This means that if you are building a business based on advertising, your core model is based on a rocky foundation. It doesn’t mean it won’t work, but it does mean that:
1.) Someone / anyone can take away your revenue stream quickly (look at the advertising revenue from TV that is being sucked away by Google and the internet).
2.) Your economic denominator / economic engine (as described in the book Good to Great) will be driven by forcing additional externalities on your customers and not on building better products (i.e. get more eyeballs at all costs vs. build a better product at all costs).
3.) Your competitive landscape will not be driven by capabilities, it will be driven by attention acquisition: Meaning you’ll be trying to outwit competitors who are in the entertainment/media space (competitors who may be much better suited at grabbing attention than you).
Although Google has been incredible successful using the advertising model, they are one of the exceptions and it remains to be seen how long they can hold out until someone comes up with a “just as good” search engine with no advertising (this gives you a clue as to one of the projects on my plate). And the founders of Google didn’t have the advertising model at the beginning, they decided upon it once they started needing revenue.
The solution to the advertising as an externality is to create a business using something similar to the Skype model. This could be the Trial/Purchase model (aka Schick razor … give away the low end handle – and charge for the additional necessary piece - the blade), or the Skype premium model (give away the basic model and charge for additional services).
* Stop trying to be Google and create an advertising based business, it probably won’t work.
* Create a business model that will provide plenty of revenue when only 5-10% of your customer base opt for the premium version of your product (i.e. Skype)
* Use a $0 entry price point to get as many people into your system as possible (the Trial/Purchase model)
* If you can create a model where you eliminate the externality of advertising, while your competitors require advertising to live you can outpace them quickly
Although this has been somewhat of a general post rather than an a specific entrepreneurial problem post, I hope it has been interesting.
See you on the wire.