The first Web 2.0 Conference held in San Francisco in October 2004 , shortly after Google's initial public offering - the biggest IPO of a technology firm since the second dotcom boom, had created a stir. Google’s IPO did not just announce Silicon Valley’s return to Wall Street. It also unveiled a new business model. When Google at last revealed just how much money it was making by placing small, targeted text advertisements next to search results, jaws dropped. Overnight, every entrepreneur had learnt a new one-word pitch to venture capitalists: advertising.[1]
Indeed, Web 2.0 today still seems to have only one business model - advertising, and the Valley needs to admit that only one company (Google) with only one of its products (search advertising) has proved that the model really works. Google's search dominance made CPC based advertising the de-facto monetization standard on the web. Yahoo and AOL also did their best to grab a piece of the action. In this pursuit of "eyeballs", a series of new internet stars emerged: MySpace, YouTube, Facebook, Twitter. Each provided a free service in order to attract a large audience that would then—at some unspecified point in the future—supposedly attract large amounts of advertising revenue. It had worked for Google, after all, and ought to work for the others. But the reality, it turns out, is that the number of companies that can be sustained by revenues from internet advertising is much smaller than many people thought. Not one of them has really become an advertising success in its own right.[1]
In the words of silicon valley investor Dave McLure, "What has all this Don't-Be-Evil-AdWords-Click-Happiness done to the internet & startup ecosystem? It's made us a bunch of lazy, ad-happy, Web-Tards with crappy ROI. So crappy in fact, we should be ashamed to call ourselves entrepreneurs & venture capitalists." He thinks that "We have largely WASTED an entire web decade of time, energy & venture capital on extremely inefficient revenue models. There have been a few interesting examples of startups acquired in the early 2000s for large amounts due to amazing growth (eGroups, MySpace, Skype, YouTube) or advertising potential (aQuantive, DoubleClick, AdMob, RightMedia). However, mostly the decade has been an uninterrupted string of uninspiring business models and small-time acquisitions of Web 2.0 startups filled with rainbows & unicorns, rather than those based on simple, transactional revenue models."
From The end of the free lunch (The Economist): The idea that you can give things away online, and hope that advertising revenue will somehow materialize later on, undoubtedly appeals to users, who enjoy free services as a result. There is of course business logic to it, too. Due to the nature of the internet the barrier to entry for new companies becomes very low. In the ads world, the minority of customers who pay subsidize the majority who do not. The internet also allows companies to exploit network effects to attract and retain users very quickly and cheaply(mostly for free). So it is not surprising that rival search engines, social networks or video-sharing sites give their services away in order to attract users, and put the difficult question of how to make money to one side. If you worry too much about a revenue model early on, you risk being left behind.[2]
Ultimately, though, every business needs revenues—and advertising, it transpires, is not going to provide enough. Free content and free services are a fanciful idea. But the lesson of two internet bubbles is that somebody somewhere is going to have to pick up the tab for lunch.[2]
A common theme faced by VCs backing potential startup ideas is an abundance of driven entrepreneurs brimming with energy to build something meaningful and cool, and without an eye out for the proverbial pot of gold at the end of the rainbow, which would - well - seem altruistic and good. But in one such advisor's own words "Time after time, I have asked "interesting idea, but how are you going to monetize it?" and received back flowery explanations that boiled down to "advertising" or, worse, AdSense. One group was even more disconnected, explaining that their goal was to build a large community of users, then they'd "figure out" how to make money. A busy site can certainly make for a great hobby, a fun project to fiddle with, and maybe a few bucks at the end of the month, but (with precious few exceptions) that's not a business. Further, while there might be high-flying estimates of future advertising revenue in the online world, it isn't often highlighted that the competition is going to get tougher too. A company like IBM might spend millions on advertising, but their money is going to skew towards a small number of large sites, NOT a large number of small ones, meaning that unless you want to build a business on the nickel and dime PPC payouts of Google's AdSense, AuctionAds, and related, you've got a fundamental problem in your business model."
Hence Advertising, it would seem today, is the standard business model for Web companies that basically don't actually have a business model. Folklore has it that a popular service will have lots of users, and a few ads on the side ought to pay the bills. Two problems have emerged with this model: the price of online ads and click-through rates. Facebook is an amazingly popular service, but it also an amazingly ineffective advertising platform. Even if one could figure out what the right ad to serve next to a high-school party pictures might be, a person's friends probably won't click on it. No wonder Facebook applications get less than $1 per 1,000 views ,compared to around $20 on big media Web sites.[3]
In the old boom days the model was pretty simple. 1. Have a great idea. 2. Raise money to bring it to market, ideally free to reach the largest possible market. 3. If it proves popular, raise more money to scale it up. 4. Repeat until you're bought by a bigger company. In today's tougher climate and dried up VC funding, steps 2 through 4 are no longer available. So Web startups are having to do the unthinkable: come up with a business model that brings in real money while they're still young. This is actually nothing new in the world of business. But it is a bit of a shock in the Web world, where "attention" and "reputation" are the currencies most in demand, with the expectation that a sufficient amount of either would turn into money someday, somehow.[3]
Also, there have been experts who in fact, contend that there is a fundamental flaw in the very belief that advertising alone can yield revenues. Wharton Professor Eric Clemens argues that the Internet shatters all forms of advertising. “The problem is not the medium, the problem is the message, and the fact that it is not trusted, not wanted, and not needed,” he writes. He obviously goes beyond the contentious realm of seeking online advertising as a viable business model, and instead questions the hype around advertising itself. He suggests that simple commercial messages, pushed through whatever medium, in order to reach a potential customer who is in the middle of doing something else, will fail. "It’s not that we no longer need information to initiate or to complete a transaction; rather, we will no longer need advertising to obtain that information. We will see the information we want, when we want it, from sources that we trust more than paid advertising." He contends that better targeting of ads using individual interests and individual behaviors will ensure that we do not bore or annoy as many people with each ad, but still cannot address the trust issue. As for paid search, it is closer to other mechanisms that allow a website to sell access to potential customers. It works effectively as a revenue source for Google, of course. But it surely is not replicable for the average content website.
Eric argues that there are categories for creating value that can be monetized, including selling real things(think Amazon), selling virtual things(think Second Life, participation in virtual communities like Facebook), and selling access(recommendations on rating sites as TripAdvisor).
But does this mean that the proverbial "Free" will retreat in a down economy? Not necessarily. According to Chris Anderson, author of Free: The Future of a Radical Price, the psychological and economic case for it remains as good as ever -- the marginal cost of anything digital falls by 50% every year, making pricing a race to the bottom, and "Free" has as much power over the consumer psyche as ever. But it does mean that Free is not enough. It also has to be matched with Paid. "Just as King Gillette's free razors only made business sense paired with expensive blades, so will today's Web entrepreneurs have to not just invent products that people love, but also those that they will pay for", he says.[3]
However, there is another, more significant change that is happening to the evolving internet landscape. The golden age of the Web - a unified aggregation of sites people accessed using standard or similarly formatted PCs and browsers, is being replaced slowly by new-age iPhones, Androids, Kindles, Tablets, and TVs connecting to the Web. The whole framework of the Web(and thus web based marketing) is based on the premise that everything is compatible in format. Now, suddenly, Apps that work on the iphone, don't work on Android. Widgets for FiOS TV don't work anywhere else. Also, more and more of the interesting content on the Web is increasingly hidden behind passwords - such as in Facebook. Analysts at Forrester research have coined this fragmented internet landscape as the 'Splinternet'. "The standardized Web established links, click-throughs, and analytics, and in turn gave rise to now mainstream interactive marketing tools like online advertising, search marketing ads, and e-mail marketing," they write. Forrester figures that in the U.S. alone, marketers poured $25.6 billion into these technologies last year. This will change now as marketers will have to move with caution through the new world of duelling devices, applications and standards. Investments in one cannot be easily transferred to another if one makes a mistake. In the era of the unified Web, if a company chose to advertise on a poorly performing site it could move its ads to another site. In the Splinternet, there may be no choice but to start from scratch. This will lead to a rethink in analytics, links and measurement as the new environment(s) unfold. Apple recently announcing a new iAd platform for the iPad, is already indicative of what the siloed, fragmented nature of advertising within an ecosystem with boundaries may look like.