Web 2.0 and the end of advertising

Web 2.0 and the end of advertising

Summary: The idea that software on the Web is going to get funded by advertising has got it completely the wrong way around. Businesses will use on-demand software to get closer to their customers and prospects, and vendors will get paid accordingly.

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TOPICS: Software, Browser
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The idea that software on the Web is going to be largely funded by advertising is just so wrong-headed, I hardly know where to start. It had me spluttering in the latest BriefingsDirect Insights analyst podcast hosted by Dana Gardner — more on that in a moment. Let's move on from 1.0 notions of the Web as just a publishing medium, with ads on the side. Doc Searls already pronounced what I consider to be advertising's epitaph way back in March 2006: "Why build an economy around Attention, when Intention is where the money comes from?"

Woman chasing dollar signInstead of competing to grab attention, the way to sell on the Web is to align your selling proposition with buying intention. The Web makes that easy, because it's a platform for software automation. So use software to build automation that brings buyers and sellers together on the Web. Not just as a broker that matches deals with no added value, but by putting relevant sellers conveniently at hand at the moment when a buyer is ready to buy, making the discovery and transaction process a smoother, better, cheaper experience for all concerned. I'll expand below on some examples of how that might happen, but here's how I summed it up in the podcast (quoting from the transcript):

"... the Web enables people to reach potential consumers and business prospects directly, rather than having to go through this advertising. So, the idea that the software industry is going to get funded by advertising has got it completely the wrong way around. Actually, what is going to happen is that business is increasingly going to use software in order to get closer to its consumers and its prospects. It can actually skip having to spend the money on advertising in order to make that connection."

I'm not saying advertising will go away completely — I think there's still room for brand-building and attention-seeking around the fringes of traditional content such as entertainment and information — but software vendors (such as Microsoft, apparently) who stake their financial futures on earning the bulk of their revenues from that form of advertising are making a fatal strategic error. Here are three compelling arguments why I believe advertising is going to get sidelined by intention-focussed selling on the Web:

  • Advertising is the creation of a disconnected era when businesses needed some way to get a message out to prospective customers that they couldn't reach directly. The purpose of an ad is to motivate the prospect to get in touch. The Web, as we all know, puts us all in direct, real-time contact with each other, wherever we are in the world. Instead of advertising a message and waiting haplessly for a response, businesses can proactively connect directly with their prospects, reaching out to them in contexts where they're ready to buy. What counts on the Web is product placement, merchandising and other forms of direct promotion.
  • Placing ads in software is the height of absurdity. It's software for goodness sake — people use it to get things done, not to read ads. Instead of wasting valuable screen space publishing banners and text ads, why not embed some functional links, buttons and menu options that add some value to the task in hand? Cut out the ads and substitute a direct connection to a useful service. Add a pay-per-use clipart library to an online slideshow editor, embed a link to a live tax expert in an online accounting application, build workflow into an online travel booking service that conveniently helps the buyer choose and book flights, transfers, hotel and dinner.
  • There will never be enough online advertising in the world to support the software industry, let alone the entire Web. Below is a slide taken from a presentation I gave a couple of years ago to an auditorium full of marketing professionals, called (you guessed it) 'Web 2.0 and the end of advertising'. While it's true that software is a smaller industry than advertising, both of them pale into significance when you look at the entire value of the retail industry — or even more if you measure the total value of a year's global trade. Instead of trying to carve up the bite-sized advertising pie, on-demand providers should claim a slice of all those real-world transactions by making it easier for sellers to find buyers.

Comparing the value of software, advertising and other markets

This has been a constant theme of mine for several years — this from a November 2005 post titled Advertising isn’t enough to fund on-demand:

"The world does not revolve around advertising, it revolves around trade. Businesses need to be able to make and sell stuff before they have any money left over to spend on advertising. By definition, therefore, there is far more money to be made from directly supporting businesses in the making and selling of products and services than there is from vying for the small change they have left over for advertising. The majority of on-demand revenues will come not from advertising but either from taking a slice of people’s sales revenues (the Amazon.com and eBay model) or by providing services that help them operate more efficiently (the salesforce.com model)."

Or as Facebook founder and CEO Mark Zuckerberg said last year at the launch of its f8 widget platform: "You can serve ads...or if you don't want to advertise, you can just sell something." The trick is, you have to focus on what people will gladly pay for rather than what they'd prefer to get to free. Collaboration vendor BlueTie has been having some success with what it calls 'featuretisements', which integrate monetizable services into the workflow of email and calendaring, and the company gets paid by results. As its CEO David Koretz told Dan Farber in February:

"The ad model is flawed for the world of applications ... Applications are about workflow; ads are about disruption. Annoying the user won't lead to the highest monetization — that's why social networking ads are not successful. Advertisers don't want to be in an email application, but if you do it right it shouldn't feel like ads."

The difficulty faced by vendors wanting to pursue this kind of monetization strategy is that it's a whole lot harder than simply slipping in a few ads and reaping whatever pay-per-click rate they can levy. There needs to be a reliable infrastructure for measuring whatever is due to each partipant in the partnership, and there needs to be highly effective workflow so that the user experience is seamless and convenient. The ease of funding everything through advertising has meant the giants of Web 2.0 (and many venture-funded startups) have neglected the more sophisticated infrastructure needed to support such functionality.

Therefore, as I've mentioned towards the end of this week's BriefingsDirect podcast, the technology is not as mature as it ought to be and vendors will face obstacles as they move ahead with the model. But its time will come, as surely as conventional Web advertising's inadequacy and irrelevance will soon become clear.

Topics: Software, Browser

Phil Wainewright

About Phil Wainewright

Since 1998, Phil Wainewright has been a thought leader in cloud computing as a blogger, analyst and consultant.

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12 comments
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  • ...

    When are people going to say enough with the ads already? Seriously, it's way out of hand now. ]:)
    Linux User 147560
    • When are people going to say enough with the ads already

      When people stop clicking them.
      tehremo
      • ...

        Adblock, no-script, flash-block... that's how I prevent them from annoying me! ]:)
        Linux User 147560
  • RE: Web 2.0 and the end of advertising

    Right on Phil. We don't believe the ad model makes sense. We do believe the commerce model does make sense. This means utlizing web 2.0 to automate the buyer and seller experience. Four51.com monetizes commerce today such that buyers use our web platform (even including SAP integrations) free while sellers pay when they get orders. There's a lot more economic opportunity tied to transactions than technology or ads.
    morint
  • RE: Web 2.0 and the end of advertising

    You are right on target. When you have content worth paying for, people will pay. Our training community site at http://www.digitalchalk.com has people buying classes for a fee every day.
    Chalkboy
  • Adding services directly into SaaS applications

    Your example of embedding a link to a live tax expert in an online accounting application is a good one. Small companies moving to SaaS accounting solutions would surely like to have online access to an accounting expert. They sometimes need someone to answer a specific question based on the transaction they are working on.

    Today there are many people posting essentially the same accounting question to web forums. There is an opportunity here to offer micro-consulting direct from within a SaaS solution. It should be possible to get intelligent automatic advice using my current application context.

    I want to have real-time access to someone qualified to answer my question. If someone else has already asked the same question then tell me the answer (and complete the transaction where possible).

    There is a middle ground between free web forums and paying expensive accountants or tax specialists a retainer. Forums are free but take significant time to search for answers. A micro payment for answering a specific question, in real-time, and in-context, could be attractive.
    AndrewBiss
  • RE: Web 2.0 and the end of advertising

    Good article. Confirms my belief that 2.0 is an opportunity for the PR industry, and big threat to advertising.

    Interesting you use Facebook as example -- aren't they still groping for some way to make money from their huge traffic?

    Chris Parente
    http://cparente.wordpress.com
    teknofin
  • RE: Web 2.0 and the end of advertising

    dwr50 say:
    Greed is the CAUSE...
    Advertising is the EFFECT...
    Open Source is the ANSWER... Amen.
    dwr50
  • Entirely sensible, Phil

    Thank you for laying it out so clearly.

    Regards,
    Narr vi
    Narr vi
  • Mmhhh RE: Web 2.0 and the end of advertising

    Hi Phil. Just comment your statement "putting relevant sellers conveniently at hand at the moment when a buyer is ready to buy" i do believe that in a c2c age entrepreneurs must make hot the needs in the market having the right stuff that the market wish to have. Is not easy but is possible. The World Of Mouth for you is or is not a form of advertising?

    ciao.

    alex k.

    http://icturismo.ning.com/profile/piramidenet
    http://www.xing.com/profile/Alex_Kornfeind
    kornfeind
  • RE: Web 2.0 and the end of advertising

    Timely or untimeley, an article dated May 22 on the Washinton Post by Peter Whoriskey says that, "The growing practice of "behavioral targeting," or sending ads to online users based on their Internet habits, is now under scrutiny by the Federal Trade Commission, whose review could shape not only Web advertising rules but the character of the Web itself. "

    This is so true, since the power of the internet is its ability to meet the needs of the users based on their beahvior and interaction with the web. The web is a two way communication medium unlike other media such as the TV and Radio. If the FTC forces certain rules, I do hope it enforces the same on ondemand cable and Tivo which operate similarly. The fact is that telecom companies know our calling behavior and credit card companies know our spending behavior - will the FTC prevent these companies from using the data to better serve their customers?

    Monetization of Web 2.0 ( SaaS ) application is an impotant question for all software companies. Gianpaolo from Microsoft says it is the next frontier for SaaS. He points out that "At a high level, software / service monetization can be put into 4 main categories:

    * perpetual license (e.g. one time charge of $85 and you get unlimited access to the software)
    * subscription (e.g. $20 per user per month)
    * usage based also known as transaction based (e.g. $0.05 per text/SMS sent)
    * and ad-funded (the service is free for the user and is paid for by someone interested in getting your attention while you are using the service/software)"

    The ad-funded model which depends heavily on tracking user behavior is the most vulnerable in the FTC review.
    rnayak
  • RE: Web 2.0 and the end of advertising

    I think that people are getting used to have advertisement in their favorite services. For example the people favorite search service, Google, has made a good profit. Why not business services ?. I think people now are more forgivable of having advertisement in business applications than a couple of years ago. In http://www.winsaas.com we have advertisement mixed with free business services and until now the users opinion is that it is a reasonable compromise between free services and advertisement.
    miguel.ribeiro