Why monetisation by advertising sucks

One thing people seem to have been able to agree on about web services is that they ought to be free. However, even on the web no service is ever free to deliver, hence the importance of advertising.

Incorporating advertising into a web offering is often seen as a no-brainer: free money that you would be stupid to turn down, whatever your business model. However, I believe this assumption holds insidious consequences that can be bad for producer and consumer alike.

Advertising solves nothing

It always surprises me how blind people are to the cost of advertising. If I watch a movie on TV, I might sit through 15 or 20 minutes of advertising content that I wouldn’t say I wanted to watch. How much yould you pay to get 20 minutes of your life back to spend on something else?

Advertising has costs on the producer as well, in terms of trust. Seth Godin describes the problem eloquently:

The digital world, even the high end brands, has become a sleazy carnival, complete with hawkers, barkers and a bearded lady. By the time someone actually gets to your site, they’ve been conned, popped up, popped under and upsold so many times they really have no choice but to be skeptical.

Basically, it’s a race to the bottom, with so many people spamming trackbacks, planning popups and scheming to trick the surfer with this or that that we’ve bullied people into a corner of believing no one.

In addition to the hidden cost, advertising doesn’t bring more value into the economy, it merely reallocates it. Advertising-funded services aren’t really being provided for free, they are being paid for by the people who buy products that have been advertised (the sellers having passed along the cost of advertising to the consumer).

There are two possibilities as consumer of advertising-funded material: either you are one of the customers of the advertised products, or you are not. In the former case you are paying just as much for the content as you would if you paid directly. In the latter case, you appear to be getting a good deal by getting “free” content that is being subsidised by somebody else, but there’s a hidden problem.

The problem is that if you aren’t the one who pays, the content producers have no reason at all to cater to your tastes. If your favourite TV show is cancelled or your favourite blog stops being maintained, you don’t have any cause to complain: you were jus a freeloader, who was getting by on the fact that someone else was willing to pay for the content you enjoyed.

Missed opportunities from advertising

So advertising isn’t all that it’s cracked up to be, but it’s still the choice of individuals. If both the producer and consumer are happy with their ad-funded arrangement, even if it’s not 100% efficient, why should I care?

I care because I think using advertising has externalities. The most obvious is that making everything free at the point of use hides pricing signals. The amount of ad money made by reading a 3-page article is roughly the same as made from a worthless advert-packed spam page. In fact, you might be less likely to click on ads while reading a worthwhile article. Certainly there’s no way to show that you value one web page 3 times as much as you do another, when it’s all free at the point of use.

Right now I’m writing an article about internet business models, but it’s to my economic advantage to include terms like ‘mesothelioma’ or ‘acai berry’. In fact, I could probably do better for myself by dropping the whole attempt to create original content and writing keyword-heavy blogspam. Would this make the world a better place?

One of the most annoying things is that we’re missing the potential afforded by dynamic pricing. The real problem with charging for content isn’t that its value is zero, but that the price is rarely right. Paying newstand price for an online newspaper is a rip-off, getting it for free is a bargain. Somewhere between those two prices is the true value of the content, if only we could find what it was. Using advertising is tantamount to abandoning this search and letting the advertiser call the shots.

“Free” may not be as important as people think

On the topic of free news content, The Economist noted the following:

A poll by Harris Interactive for paidContent:UK, a website owned the Guardian, finds that three-quarters of Britons say they would switch to an alternative free news source if their favourite website began charging.

So what? Are you telling me that if Mars bars were free, their sales wouldn’t drop by 75% when they started charging? Nobody suggests that Mars have an unsustainable business model by trying to charge money for chocolate.

Strategically, a small number of customers who care about your product enough to pay is better than a large number of uninterested consumers, all other things being equal. With advertising in its current depressed state, it’s quite likely that payment from 25% of readers would amount to more money than they could make from advertising to 100%.

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