Tuesday, 29 March 2011

The end of the ad-supported model

I've written once before about the limits of the ad-supported model. There's a finite pot of advertising money out there and at some point you have to find a different way to fund businesses on the web, or simply stop developing. The alternative is that eventually the whole world works in a media agency and earns money by advertising to itself, which is ridiculous and a scary image to contemplate.

Maybe that's why websites aren't called businesses very often; as opposed to being called social networks, or music discovery sites. Calling them businesses brings to mind difficult questions about funding and cash-flow. Amazon is called a business all the time though. Funny that.

The market likes to pretend that you can have large numbers of purely advertising funded web-based businesses and it will work fine. It's a collossal pump and dump scheme, which it's in almost everybody's interests to perpetuate, particularly banks like Goldman Sachs.

Wait a sec, you see that link on Goldman Sachs? The one you just skipped straight past? Open it now and bookmark it to read later (once you've finished this post, obviously.) It's a stunning piece of journalism.

Bookmarked? Good. On we go.

New startups like Color - who have raised $41m of investment capital - need to make the case that they can fund themselves using advertising as it's the only real revenue model open to them. Subscription services would take too long to pay back (if anyone ever subscribes at all) and the business plan would be immediately shot to pieces.

So you point at the big pot of web advertising money - £4bn last year in the UK, say new figures out today - and you boldly state 'we can win our share of that pot'.

It's a Dragon's Den reject's profit forecast.

"The market is £4bn and if we can just win 1% of that, then we'll all be millionaires and have super-yachts that make Roman Abramovich's boat look like a mirror dinghy."

"So how many Skyhooks did you actually sell last year?"

"Er.... [nervous shuffle] Have I mentioned the overall market is £4bn?"

It's in the interests of the start-ups themselves, banks, media agencies and bored marketing directors to pretend that the latest shiny web start-up will definitely work and that profit is just around the corner. It's even in the interests of the investors as long as they're not left holding any shares when the music stops. The game is to get out just in time and make your money on the way up. Like I said earlier, it's classic pump and dump but with a web 2.0 (aren't we on 2.1 yet?) twist.

I'm going to look on the bright side of human nature and assume that this can't carry on, because it's ridiculous. The emperor is parading around naked and everybody knows it, including the emperor himself. I know pyramid selling schemes never go away, but they don't usually take in whole industries for years at a time.

Eventually we'll have to recognise that worthwhile products cost more money than advertising can provide, although advertising is useful to keep the price down. Newspapers knew it for years, forgot and are just starting to remember again.

There is a relatively easy solution though and it's where I'm starting to think that we'll end up.

A large part of the cost base for internet businesses is in hosting and back-end IT infrastructure. Take Color again. Their app is very basic, whatever marketing spin the management might want to put on it. Never mind forty sensors, I'd be willing to be that 99% of the time a geographic fix to the nearest fifty metres or so would be fine. They'd probably be better suited by at least turning off the microphone, as capturing sound with the pictures is going to scare people off.

The cost (unless they're crazy) is in providing a photo hosting and delivery service to the entire world from day one.

Remember back when the internet was young and we were all going to have a website? In the end only geeks and businesses did it. Even this datamonkey doesn't have one. I've got a blog, sure, but I don't pay a tenner a month for my own site.

What we need is a model where you pay £10 (or whatever) a month for a virtual PC. A PC in the clouds if you like. Now I've heard that concept before somewhere...

Eventually, the cloud isn't going be about uploading your data, it's going to be about installing software. You host your photos, your videos and whatever else you like. You install apps, just like you do on your phone and they work with what you've uploaded (or help you to upload more.)

Crucially, you pay for the bandwidth and you only a little bit because you don't use that much. One payment runs all of the ad-supported loss making stuff you currently consume on the web. It's unlikely to be an extra payment either - you'll get it with your net connection. Even your mobile net connection. There's no risk in trying an app like Color, because you install it for free on a space that you already have.

When you think about that financial model, vs. Facebook on its own trying to pay for photo and video delivery for 500m active users, just by advertising to them, then all of a sudden the ad-funded model sounds like lunacy.

Think it won't work? How about an on-demand music and video download site offering DVD quality video and full album downloads that smashed the 12m user barrier back in 2008? It carries vast amounts of user-uploaded content and serves it on-demand. It has no venture capital funding at all.

Say hello to The Pirate Bay.

Forget the piracy issue, you're paying for the hosting and bandwidth with your broadband subscription. Social networking is very difficult on the bittorent model (unfortunately for Diaspora) because only you have got a copy of your photos and sometimes you turn off your PC. You need to subscribe to a service that provides you with an always-on connection.

I think this is where the cloud is going and the sooner we get there, the better, because this ad-funded hype driven pyramid scheme is getting seriously out of hand.

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