There is a very interesting article in Newsweek about the Huffington Post that goes discusses the economics of advertising on the Internet. In 1994, I was going around giving talks about the potential of the i\Internet to become a new medium. Some of those reading this post maybe too young to remember that the Internet was a very different animal at that time. The first browser had just been launched the year before. The residential broadband network we all enjoy was in the very early stages of development. I had just signed up a number of companies like AOL, Intuit and Netscape to participate in the cable modem trails we had launched with Viacom Cable and Comcast. I could see pretty clearly that the high speed communication to the home coupled to PCs and the platform for development and distribution of content represented by the Internet would create this new medium not only for entertainment and information but also for communications, and commerce and education. However, I was struggling about the business model. I did not feel that subscription services like AOL (that is how AOL worked in those days) would be the successful model. I came to the conclusion that it would be advertising. In those days, everyone was asking “what is the killer app for the Internet”. It was generally accepted that the spreadsheet had been the killer app for the PC. I came to the conclusion that it was advertising. Obviously, advertising is not an application. But I felt that the potential of moving advertising dollars to Internet content companies would provide the financial fuel that would allow the development of a vast range of applications. And in general this was correct. But it is no longer working.
I am not an expert on advertising. These days because of technology I get to skip over most ads on TV and rarely look at a add on the net. I think the death of advertising as the source of revenue for Internet companies is the result of simple over abundance of places to put ads coupled with a doubt that they are very effective. But frankly, I am not sure how effective advertising was in the past on TV, magazines and radio. And am pretty sure that their value is declining quickly as we can all skip over ads or get content like pod-casts that do not even contain ads.
So what will replace advertising as a revenue source for content? It is not clear to me yet. I am think the combination of free and premium services for some companies (like Linkedin) will work. I think data mining will work for other. For instance, Google may become primarily a data mining company. Facebook can be one too although I think that Facebook does not have a very compelling future (more about that in a future post).