Looking beyond the advertising business model
It feels like we’re hitting an inflection point with Internet business models. Currently, the most dominant business model for a consumer Internet business is advertising.[1] But there seems to be a growing sentiment that this needs to change. Medium recently announced it’s rethinking how it’s going to approach generating revenue. And they aren’t the only ones who think the Internet’s ad model is broken.
What’s great about the advertising model is everything is free! At least, in theory. The promise of the Internet is that it can be scaled infinitely. So anyone or anything can access any information that is uploaded to the Internet by someone or something else. This all happens at little or no cost.
This has been great and served us very well in the early days of the Internet. Just thinking about all of the information we have access to now is astounding. You can open up any web browser and do an infinite amount of queries and, almost always, find what you’re looking for. You can read the thoughts and opinions of anyone in the world, in real-time. You can watch someone else’s first-hand experience, anywhere in the world, live. Again, you can do all of this for basically nothing.
The problem is it’s not true. Yes, you can get all of the above for little or no monetary cost to you.[2] But it’s not true that you can get all of the above for no cost. Somewhere, somehow the piper is being paid. Most commonly, for businesses that rely on the advertising business model, your attention is what is being sold. Every time you do a search on Google, your attention is being sold. Every time you log into your Facebook account, your attention is being competed for by all the different services that want to tell or sell you something.
And the above assumes you’re browsing the web anonymously, which if you are the typical web user, you’re not. After all, most companies are not going to throw their money at Google and Facebook just to buy random people’s attention. They throw their money at Google and Facebook because Google and Facebook know a lot about you and that’s really valuable to businesses.
You know the famous line: “By signing up, you are agreeing to our Terms and Privacy Policy”. How many of us actually know what we are agreeing to? I mean actually know? I don’t see many hands.
This isn’t to say I think companies like Google and Facebook are evil. Instead, it’s not a question of good vs evil or right vs wrong. It’s about incentives. Google and Facebook don’t want to be evil but they also don’t want to go out of business or have to fire a whole bunch of people.
They are, however, huge public companies that face a lot of public scrutiny. What about all those random websites you sign up for to share images of cats or funny gifs? They get your data too. And even if they don’t directly ask for your data, they might get it from some other company who has your data and decided to sell it because they had to survive.
Wait, what?? It’s ok, it’s in all the privacy policies that you agreed to when you signed up in a drunken stupor late on a Tuesday night in 2013 because your friend told you to check out a cute cat picture.
This quote sums up what I am trying to get across[3]:
If you’re not paying for the product, you are the product.
In addition to advertising being a sketchy way of making money, it’s also a shitty user experience. Any time you go to a free article on the web, you are almost guaranteed to see a couple banner ads, a popup asking for your email, and an auto-play video advertisement. Nobody wants any of that crap. In fact, I’d bet the website you're visiting probably doesn’t even enjoy showing it to you. But the only way they can please their true customer (the advertiser) is by showing you more of it.
There have been some improvements to the advertising user experience with things like native ads. Which are ads that look just like normal content but are paid to be shown. An example of this is sponsored Tweets or Facebook posts that show up in your feed regardless of whether you follow the company or liked their page. They may be a better user experience than the huge banner ads and popups that meet you when visiting a typical site, but they still aren’t desired.
In response to privacy concerns and crappy user experiences, consumers have been fighting back with things such as ad-blockers. Ad-blockers are not just a niche thing either. Millions of users have them installed on their browsers on both desktop and mobile.
This is obviously not great news for websites that rely on advertising dollars as their main revenue source. It has even created a heated debate about the ethics of ad-blockers. Is it ok to consume content for free if you are avoiding paying the content creators in some way? Is it ok to pass on the costs to other users? In fact, there’s even a bit of a cat and mouse game going on now between the developers of ad-blockers and the developers of websites that rely on advertising.
Regardless of your stance on the ethics of using ad-blockers, there’s no denying the advertising business model on the Internet is reaching a crossroad. On the one hand, having access to basically free content is awesome and has pretty much defined the web since the beginning. But on the other, advertising has gotten really fing annoying and taken to the extreme by companies desperate for revenue.
The problem is, there really haven’t been any great alternatives for consumer Internet business models. It’s easy to get sucked into this game too as a business. Create something. Put it on the web. Give it away for free. And attract as many users as possible. Figure out how to make money later (hint: ads).
That sounds really attractive. And it is really attractive. Especially to startup founders and investors. Some have made a lot of money with this model. And some will continue to do so.
How sustainable is this? And is this what we really want to do?
As a tech founder myself, it’d be awesome to create something that millions of people would want to use. But I also want to give my users the best experience possible and I just don’t think the advertising model can provide it. I also don’t think we want to build more apps and websites that rely on advertising. Most of the people I know in tech hate ads. We hate ads as consumers, yet we spend our day jobs creating products that rely on them.
It’s also, to a certain degree, encouraged by us consumers. We balk at paying $0.99 for an app that can measure our heart rate, send it to our doctor, and predict when we’re going to die.[4] Yet we have no hesitation to pay $4.50 for a grande cup of crappy coffee.
So what are the alternatives? How can you build an Internet business that costs users very little to access yet doesn’t bombard a user with advertisements?
Unfortunately, I don’t have a perfect solution to this problem. Come on, you weren’t expecting me to just give you a one-size fits all solution, were you? Instead, I think an area that particularly interests me as having not one but many potential solutions to this problem is cryptocurrencies.
For those who aren’t familiar with cryptocurrencies or the Blockchain, I am not going to go into great detail on what they are or how they work but I really don’t think you need to know those details to understand how they could be used as an alternative business model to advertising.[5]
There are two main ways I think cryptocurrencies can replace the advertising business model on the Internet. The first is the simplest to envision, micro-payments.
You may or may not have heard of the term micro-payments before but basically all I mean by it is making very small payments. For example, fractions of a penny at a time.
With the current monetary system, there isn’t a great way to give someone (or something) a fraction of a penny. I can’t just take a penny out of my pocket, cut it into fourths and give a fourth of a penny to someone. They may question my sanity if I did (they still may).
But you can’t really do this digitally either. In theory you can pay someone $0.0025 since it’s just a calculation but the problem with this is the amount of hands that $0.0025 has to pass between. When you factor in the various banks, credit card companies, and merchant accounts that are involved in the typical transaction, the fees to process an exchange of a small amount of money between parties would far surpass the actual amount exchanged. Making it pointless to transfer this small amount of money between parties.
If there are no banks involved by using a cryptocurrency to exchange funds between parties, the fees can be extremely small and actually make exchanging something like $0.0025 worth it.[6]
This would make it possible to have business models where the consumer pays very little (fractions of a penny) for each piece of content they consume (like an article, song, etc.), yet a business could make a lot of money when that fraction of a cent is multiplied by the large audiences of the Internet (i.e. the world’s population).
This is essentially what the advertising business model already does. But instead of the consumer paying the business directly for the content, the advertiser is essentially paying fractions of a penny to the business to get their ad in front of your eyeballs. Add that up over millions of pageviews and you can see how a business can make a lot of money selling ads. Yes, micro-payments requires a large audience to make good money, but so does the ad model.
There already is a micro-payments model being used today, in-app payments. Most don’t think of in-app payments (think buying levels or upgrades in a game) as a form of micro-payments but it essentially is the same idea. You pay a small amount of money ($0.99 typically) to consume a digital product. The reason in-app payments can exist, despite all the things mentioned above for a transaction so small, is because there is one company (Apple or Google) that processes the transaction. This can be done economically by lumping all users’ transactions together and only paying the fee on that one large transaction.
For digital goods like articles, videos, songs, level upgrades, etc. the micro-payments model makes a lot of sense. The only issue with it is consumer behavior and expectations. We’ve all been trained to believe everything on the Internet is free. So how do you convince someone who has never read any of your posts before to cough up $0.0025 to read your rant on Internet business models? Despite it being a really low amount, I can see why you might hesitate to part with your hard earned 1/4 cent.
The other alternative model that uses cryptocurrencies is investment. Not investment in the speculative investment sense that surrounds a cryptocurrency like Bitcoin (though that is part of it), but investment in the protocol by participation and consumption.
Cryptocurrencies, like other assets, have value. This value all depends on how the market perceives that value. If I created a digital currency today but didn’t tell anyone about it and you couldn’t do anything with it, then it would have no value.
But for digital currencies like Bitcoin, where you can use it to buy goods and transfer funds, it has value. That value is calculated like any other asset on the market, by supply and demand.
Applying this idea to Internet business models can get pretty interesting and complex. But to keep it simple, let’s use Twitter as an example. Imagine if instead of using the ad model like it does now, Twitter instead created its own digital currency, let’s call it Twit. By participating in the Twitter network, you can earn Twits. The more likes or retweets you get on one of your posts, the more Twits you can earn.
Then you can use those Twits to get access to extra features like embedding Tweets, creating moments, or accessing the API. Since it’s a digital currency, in theory you could also use it to buy goods (as long as the seller accepted Twits). Or trade it with someone else to buy more of your preferred currency.
The creators of Twitter (and Twit) could have decided in the beginning to allocate themselves 1,000,000 Twits each. Over time, as Twits rise in value, the value of the founders of Twitter rises, just like any other business.
There are already a few businesses that are starting to test this model out. The most popular amongst these and the closest to the model I walked through above is Steem. Steem is kind of like Reddit 2.0 but is backed by its own digital currency. By participating in the Steem network, you can earn real money. It’s a really interesting idea and one I hope is experimented with more.
There is much more you can do with a digital currency and I am over simplifying a lot but the point is you can create an alternative business model to the advertising model that still keeps the core spirit of the Internet alive but doesn’t have to spam Internet users to survive. I think as the Internet continues to mature and innovate, we’ll see more and more new business models like the ones I’ve outlined above.
[1] I am just going to focus on consumer Internet businesses in this post. B2B Internet companies do have a number of different models that seem to work fairly well (i.e. SAAS, Freemium, etc.) and they have the advantage of users who have budgets specifically for spending money on these things.
[2] I am no expert, but I am assuming the monetary costs would be some portion of the combination of the cost for the device you use to access the Internet and the cost you pay to a service provider to hook you up to the Internet.
[3] I don’t remember who said this originally :/
[4] I’m kidding, an app like this doesn’t exist. But if it did, you’d probably debate whether or not it was worth $0.99.
[5] If you want to learn more about cryptocurrencies and the Blockchain, I recommend Googling it. It is constantly changing so it is hard to give any one resource but searching for it will definitely turn up some good results.
[6] A lot of people seem to get tripped up by the feasibility of cryptocurrencies because they say: “no one will ever understand what the value of this coin is” or “the coin is to volatile to be used practically”. But I think they overlook the fact that a cryptocurrency could be used strictly for the transferring of funds between parties. You don’t have to show this to the end user and can instead show their home currency. And you don’t have to hold the cryptocurrency for longer than the time it takes to process the transaction.
Now, I know I am glossing over some things here, but the point is cryptocurrencies for micropayments can be used strictly as a means to transfer funds and nothing more.
