@andrewchen

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Not everything can be free!

Will people pay for anything on the internet?
A recent article on GigaOm:  O2 Offers Napster For Free! Big Question – What will people pay for in the future? with the quote:

It is our contention that in the future, we will only pay for broadband access. Voice, Video or whatever is going to become part of the “access” offering.

There’s been a similar discussion revolving around PlentyOfFish.com, which is turning online dating from a paid subscription model, to a free ads-supported model.

However, a colleague of mine Basem Nayfeh once remarked, "It doesn’t make sense for everything on the internet to be free and ad-supported – SOMEONE has to pay the bills!" (And note that Basem is the CTO of one of the largest and most well-funded ad startups in the world right now)

Let’s dive into why he says that…

Are you a free site? Or not?
One of the key drivers of Web 2.0 is that the sites you are building are likely free, and ad-supported. This is great in theory, since customers like things that are free. However, imagine a world where EVERY internet site is free and has advertising revenues. In that world, every site would be buying traffic from every other site, and because it’s not a frictionless exchange, money would be lost from the system and revenues would eventually go to zero.

As a result, the only way to prop up a system where it’s just ad-supported companies buying from ad-supported companies, you need a bunch of external money like venture capital. But then you’d just end up with the Facebook installs ecosystem (haha! Just kidding Mark!)

So it’s pretty clear that you need some amount of external money flowing into the ad buying, and thus, let’s look at what an old guy thinks: Newton’s Third Law, which relates to online advertising (I swear!):

To every action force there is an equal, but opposite, reaction force

I cite this because the same holds true in online advertising – Newton did not say this by the way:

For every online advertisement, there is a publisher and there’s a buyer

and thus its corollary:

For every free ad-supported site, there’s some number of transactional sites that support it

And in fact, this statement probably goes even deeper down into the "type" of advertising inventory that’s growing on a site. For example, even if there’s a lot of advertisers willing to buy car/truck/bus ads, if there’s not enough ad inventory being produced by online publishers that fits into that, then that creates an imbalance as well.

The big question
So as a web entrepreneur, you have to ask yourself a Big Question. In the long run, are you a:

  • Free, ad-supported site (an "Ad publisher")
  • Or a paid site that buys to get clicks (an "Ad buyer")

Do you know the answer to that? Sometimes it’s not immediately obvious.

Here are some signs you might be better off as an ad buyer:

  • It’s hard to get traffic :)
  • People don’t use your site every day
  • People use it only when they are "in-market" for some number of weeks
    • (Dating, shopping, researching homes, researching schools, etc.)
  • It’s hard to get people to come back for multiple sessions
  • People spend a lot of money in your category
  • It’s unlikely people want to tell their friends about your site, or that their friends are unlikely to be "in-market" at the same time

Similarly, these are signs that you are better off as an Ad publisher:

  • It’s easy to get lots of viral traffic
  • People use your site all the time, all year around
  • People don’t spend much money in your category, or there are lots of competitors
  • There’s no "point" in using the site – sometimes it’s time-wasting activity like entertainment

Where’s the gray area?
Obviously there’s a lot of gray area for this – in many ways, I’m sure that PlentyOfFish is as much a communications site as a dating site. Or the same as MySpace. Similarly, for shopping or music or photos, a lot of these sites are as much social entertainment experiences as much as they are transactional experiences. That’s why you have transactional sites like Shutterfly, but also ad-supported sites like Flickr.

So for each entrepreneur’s business, it’s worthwhile to evaluate it in different ways – but please keep in mind, just because your competitors charge money, it doesn’t mean you can go free and succeed. Because not everything on the internet can be free :)

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