Who's going to pay for all this?
It seems like every time I come online, I'm surprised to find a new site or service that's entertaining, useful, and absolutely free: blogs, podcasts, online banking, classified ads, videos, photo sharing sites, and more. And just about all of them are ad-driven. As developers and writers spend their workdays creating free content and services, the demand for online advertisers will increase proportionately. But as more services move to a free-to-the-user, ad-funded business model, won't the supply of advertisers decrease? Or at least stay the same?
There are very few services that I pay for on the internet. And I can't really say that I click on many advertisements. A big reason for this is that I know that so many things (that I use) are available free of charge. Plus, many of the ads I see are for companies that sell complete crap -- work-from-home opportunities, ringtones, credit cards, etc -- whose days in business, I pessimistically believe, are numbered.
Google challenged the traditional online advertisement model with the creation of AdWords and AdSense, their pay-per-click systems. Speaking from my own experience, however, I'm not sure how many internet surers are willing to click on even the most relevant ads. I have become so numbed to online ads that I hardly notice them anymore -- and I'm not the only one. I built a website last year for a local water treatment professional and when we tried to advertise online with a strategic Google AdWords campaign, it took weeks before ever receiving our first click. Most of the traffic came to his site via word-of-mouth advertising.
I am much more likely to visit a site if I followed a link from a friend or a favorite blog. As more communication takes place over the internet and as more people build their own websites that allow them to recommend sites and businesses, the supply of word-of-mouth advertising will increase substantially, thereby lowing our demand for the less effective paid ads. But as more services are provided free of charge, we will increasingly depend on the paid ads.
I believe that as time goes on, fewer companies will be willing to pay for advertising online. With the exception of big-name companies like Coca-Cola and HP that have always spent millions on marketing, many of the ads we see online will be paid for by startups that will soon die after overestimating their traffic generated by paid ads. It sounds bitter, but it looks like as time goes on, the ever-growing machine of free online services will be fueled by the failed ventures of others...creepy!
posted by Scott Bliss @ 7:06 AM
1 Comments:
At July 28, 2008 10:38 AM ,
Steve said...
That's a pretty bleak outlook on internet advertising. I agree that it extremely rare that I click on an internet ad, and that you are much more likely to see an ad from a doomed company online than on TV or in a magazine. I also agree that I am, and we are all as a society, extremely desensitized to advertising. We think nothing of ads on TV, the Internet, Radio, Magazines, Newspapers, Highways, etc.
While I pretty much never click on an internet ad, I don't think I've ever seen an ad on TV and immediately bought the product either. Advertising is the news for businesses that sell to the public. It is how they establish brand recognition, announce new products, dispel bad rumors, enhance good rumors, and generally do PR. It is very important to a company that people be comfortable with their product - that means familiar with the name and looks - BRANDING! It might seem stupid to me that companies like Coke or McDonalds spend billions on advertising when everyone already knows they exist. But, it keeps people familiar with them, and that makes their products feel safe to people.
Internet ads are not really any different. Companies try to make them so profuse that eventually you do feel comfortable clicking on them, or buying their product in real life. The revenue model can be somewhat different. Ads on entertainment like the ones during shows on hulu.com or other streaming sites is pretty similar - pay for an ad that appears X number of times. Other ads can be paid for purely by effectiveness - you don't pay for an ad on Google AdWords until someone clicks on it, and you don't get paid for hosting AdSense until someone clicks on it. This means your ads can be seen for free. They can also be more targeted than TV ads - by location, and obviously by context. This makes internet advertising more cost efficient in many cases.
Here is a chart listing annual US advertising expenditure from 1919-2005 (http://www.galbithink.org/ad-spending.htm). The average is about 2.2-2.3% of GDP, about 271 Billion dollars in 2005. Internet ads are growing nearly exponentially as a percentage of this ad money. From January to September 2007, Internet ads accounted for 7.7% of all ad spending (http://www.marketingcharts.com/television/tns-us-advertising-spend-grew-02-in-first-nine-months-of-2007-2694/tns-measured-ad-spend-share-by-medium-jan-sep-07jpg/), surpassing radio for the first time.
This is a huge revenue base which can be tapped into to provide free internet services. This is the same way broadcast television was paid for, and what keeps other media sources cheap. I don't think this is as much of a change as a lot of people think. The differences between ads in other media and the Internet are the same as the basic differences in the medias themselves. Internet ads are more targeted, just like websites are more targeted than TV shows, so you are more likely to see an ad from a small company.
While I don't often click on ads, you know they have to work on some level - millions upon millions are being spent on them and pay per click ads are more or less Google's entire revenue stream.
OK, that was kinda rambling and I'm not sure there was a point, but I'm not about to read back over it.
Steve
www.iHateWheat.com
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