06 Jun Searching for revenue streams
In the late ’90s, a constant parade of start-ups came through my office showing business plans that relied on “monetizing eyeballs” and revenue sharing to generate an income and achieve some splendid valuation. We all know how that story ended: companies – eBay, Amazon, Yahoo, Google, and a very few others – that presented a strong value proposition to consumers weathered the storm and those that relied on other companies for their businesses, more or less, did not.
Today, the parade is back and this time the start-ups are beating the drum of free software and services. These so-called Web 2.0 businesses give away sometimes outstanding functionality now in hopes of finding a business model somewhere down the line. In the meantime, most of these companies are tapping advertising networks and hoping to build a revenue stream (trickle?) from click traffic. (Feels a whole lot like monetizing eyeballs, doesn’t it?)
A very few companies are honest about their missing revenue model. I had a refreshing conversation with the founder of Cooliris, who told me that the company isn’t entirely sure how to generate revenue in a world where very useful software is given to consumers at no cost. As a result, the company decided it would not take outside investment so that it had no pressure to develop a bogus model in hopes of satisfying the venture community.
The vast majority of companies, though, are embracing a different model: If we build it they will come and when they come they will click on ads served by some other company’s advertising and relevance engine and when they click we’ll make a small bounty and they will click often enough that we’ll make enough money to pay our squadron of engineers and make our investors happy.
It just doesn’t seem sustainable to me for several reasons.
First, I don’t like businesses that are dependent on other businesses for their customer revenue. Effectively, these businesses are held hostage to the revenue-sharing and engineering of Google and other ad networks. It may be an easy way to get some cash through the door early on, but it isn’t sufficient to building a valuable growth business.
Second, and I may well be alone in this belief, I don’t think ad models are going to continue to generate revenue on the Google scale for any company but Google. We’re inundated with so much advertising while Web browsing that we are becoming inured to it. In the context of Google, when we are actually looking for something, a paid ad link in context might be very useful. But when we are doing any of a number of things that fee sites enable, the ads are much less valuable and we’re training ourselves to look away.
Of course, this change is forcing advertisers to get a lot more wily. Ads are sliding in over the next logical click location, causing the browser to click on the ad rather than the function link the user intended. Pop-ups dance across the screen and don’t go away until we find the tiny close icon hidden somewhere in the ad. Yes, we see your silly ads, and we don’t like them, thank you. Sites that continue with these experiments are going to chase users to any of the dozen other competitive sites.
Lastly, at least for now, I believe consumers will pay for value and that it is fundamentally wrong not to ask to be compensated for the value you deliver to the market. I understand that advertising is a different form of payment – I’ve been talking writing about “attention as currency” for a half-dozen years. I also understand that individuals don’t equate 30 seconds of time with the value of the content or services around it. I’ve never heard someone say “Hey, wasn’t that Chrysler ad great? It’s great to see the car company’s support of – what was that show again?” It just doesn’t happen like that. If “Desperate Housewives” went to a premium cable channel, a very large audience would follow it there – because the audience likes the show, not the ads. And when they have to pay for what they want, they will do so.
The software industry, however, in large measure has become afraid to ask people to pay. Ultimately, this devalues not only the application, but also the industry.
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Copyright 2006 IDG. All rights Reserved
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