It’s 2 pm. Alice goes to Facebook. Bob goes to Amazon. Charlie goes to Twitter. If you have to bet on one of them having spent money online by 3 pm, who would you pick?
Without any further information, Bob would be a no-brainer. Amazon is an e-commerce sites, so at the very least Bob is “window shopping.” Who knows what Alice and Charlie are up to on Facebook or Twitter? This brings me to the point I want to make about these two companies. Facebook and Twitter are two examples of a model that’s been with us since the beginning of the commercial web, which is to:
- create a site
- attract many eyeballs as quickly as possible
- figure out how to make money later
In other words, Twitter and Facebook (and Google, for that matter) did not start as businesses. They were experimental web services that became popular quickly, and once they had traction they had investors knocking on their doors. These investors were confident that they would find a business model (or be acquired by someone who already had one). Hotmail and Geocities were also examples of this, just to name a couple.
As it turned out, the only way online businesses with millions of users and thousands of employees were able to generate enough revenue to satisfy their investors was through advertisement. Google was an outlier among outliers: the #1 search box of the world will necessarily capture a large absolute number of searches for stuff to buy. If this number is large enough (which it is), the rest of the searches really don’t need to be monetized.
Facebook and Twitter are different. Not many people think: “I want to buy a Veeblefetzer. I’m going to Twitter / Facebook to start my research.” We go there to consume (and maybe produce) information. Because we happen to be paying attention to a screen it is possible to shove ads in our faces.
The implication of this is that Twitter and Facebook are forced to employ one or both of these strategies:
1) Mine the hell out of your behavior to guess if you may be interested in something that one of their advertisers is selling (preferably right now). You went there to see pictures of your second cousin’s new cat or something, but perhaps they can figure out that you’re desperate to buy some tickets to Hawaii. You are not telling Facebook what you want, so they are at a disadvantage. Google knows what you asked for, so it can do a better job at matching sellers and buyers. Therefore, Google can be more cost-effective. Knowing who you are and what you like is not enough for Facebook and Twitter. What if you are a 27-year old baseball fan who likes horror movies, but right now you are in dire need of a DUI lawyer? You could be a Republican soccer mom who drives an SUV, but secretly you are into S&M and swinger clubs (it’s between you and Google). You get the point.
2) Tempt you to buy shit you don’t need. That’s the time-tested TV model. This entails annoying most people who are there simply for entertainment purposes. The worst part about this is that the most desirable consumers are the first ones who will flee to an ad-free alternative if/when if presents itself (e.g. HBO, Netflix, iTunes).
There is another problem with becoming an ad-based company. The collective purchasing power of the planet is growing more slowly than the advertising space. In other words, Twitter, Facebook, and all other advertising-based business are waging a war for our attention. And if there was ever an unnecessary war, this is it; because of search engines, advertising is less necessary than ever.
Let’s imagine that advertising were made illegal tomorrow. Obviously search engines could not make money through ads, so they would start charging. Most of us would pay, like we pay for our cellphone plans (I couldn’t find any free cellphone plans that forced you to listen to ads). Because of search engines, people would still be able to find and buy the products they want or need. There may be less buying of stuff that we don’t need, especially what’s driven by impulse. Like the chocolate cake that seduces you when you open the fridge looking for a piece of fruit. In my book that’s a good thing. Another plus is that some industries would even save money by not needing to advertise, because advertising is an instance of the Prisioner’s Dilemma for many products.
TL;DR: Please don’t start a company that would need ads to make money. Please stop working on ads. Pick an unsolved problem instead. Not only it’s potentially better for the world, but also you’re more likely to raise funding and cash out. Oh, and if you’re an investor, don’t touch ad-based stuff. If you do, you’ll be very uncool 🙂
This post was brought to you by Happy Fun Ball.
I almost agree with you. However I think you’re missing one key element where ad models can work – decision support. Specifically if I’m looking for information to support a purchase decision I might go to a specialist review site. Ads on that site, focussed on the product space, still make money (look at the CP/M that computer hardware sites get compared to social sites). I also think there is a lot of opportunity for non-traditional ad products. We’d doing some interesting things combining affiliate marketing with content marketing, using embedded content to drive sales.
Context is everything, non-focussed sites (twitter, facebook) are at a distinct disadvantage compared to niche content and search where context cues allow better targeting.
I chuckled a bit at the pre-roll ad on the “Happy fun ball” video – a 15s video for at-home coffee. I’m not much of a coffee drinker, particularly at home. Advertising without proper intent is definitely difficult.
Amen.
My company is finally ad-free:
http://blog.experts-exchange.com/ee-blog/experts-exchange-is-now-100-member-supported/
And we didn’t begin as a business, either. We started with the intent to drive ad eyeballs and remained so for over fifteen years. The road to developing a meaningful customer base took years of effort and a lot of luck which is normally the case for most ad-free success stories. It’s easy to oversimplify the groundwork brands like HBO or EE had to go through along the way.
There is no such thing as a free lunch. Advertising simply shifts the cost of the lunch to the price of the advertised products, and then adds additional costs.
Using Google for example, in addition to the natural cost of its services, we one way or another pay the following additional costs:
• Cost of building and operating Google’s ad infrastructure and business. Huge.
• Cost of ad production, ad agency, and other overhead. Huge.
• Cost incurred by the advertiser’s competitors who don’t need to advertise, but are forced to do so to not lose customers to the other. Expensive advertising arms race ensues. Huge.
• Social cost. I’d argue this is the largest. The health of society, democracy and the free market rests on the populace being well informed, not misinformed, not manipulated. The rare cases where advertising is honestly informative are far outweighed by dishonest or manipulative advertising. If you don’t see this, I won’t try and convince you right here, right now. There are better ways to inform the public about good products, for example something like Yelp but without Yelp’s conflict of interest which stems from, yes you guessed it, advertising!
Who do you think ultimately pays these new costs (in addition to the original costs)?
I think a lot of people working on ad supported products are simply trying to assuage their own guilt with the “we’re helping the third world/the poor” rationalization. See last bullet above.
Well, I have to say that the “model” is what most people are doing today. We have lost patience over too many things.
Hi Diego,
You have a point in saying that both of these companies (Twitter and Facebook) didn’t have a business model when they first started the business – however, one cannot say that ads on both of these websites are useless – in fact, Facebook is having more and more targeted ads while Twitter is great for promoting a new product, a company, or a person.
By the way, if you read the history of Google, you will know that both their founders were against advertising – it was never in their plans to make money on advertising (they wanted to make money on search). Advertising now is more than 90% of Google’s income.
The whole point is about making money.
itoctopus, it doesn’t seem like you read my post thoroughly. You put words in my mouth, I never said ads are useless. Of course is about making money.
Furthemore, I’ve been working on search since 1997. I was paying attention to Google while all this happened, because our company (Inktomi) was competing with them.
I heard a funny quote by someone recently that (paraphrased) said “the smartest people in the world are clamoring to find new ways to get people to click on ads.”
At Tell My Circle we’re working on one possible solution (per your request to “Stop Working on Ads”) by creating an engaging experience that will compel people to share their favorite businesses – along with WHY they like the business – and then make it easy for the business to engage with existing/potential customers.
This is called Social Influence Marketing and it’s downright difficult. But those who are able to crack the nut will be able to turn ads on their collective heads and hopefully make the future of finding/choosing businesses and products a less annoying experience for consumers.