Firefox and the future of ad-funded applications

Many people seem to have been surprised last week when Mozilla CEO Mitchell Baker revealed that the "bulk" of the organization's $52.9m revenue in calendar 2005 came from "search engine relationships" — which in effect means the money Google hands over for being the default search engine in Firefox's standard search query tool, plus some small change for recommending the Google Toolbar.

If people thought the 2005 number was big, I think they'll be blown over when this year's figure finally comes to light. The sums Google is now paying out to Mozilla and other traffic-acquisition partners are so large that last quarter it started breaking them out into a separate line item in its financial report: the figure was $45 million, just for the quarter.

That small query box with the Google 'G' alongside has already guaranteed Mozilla's future for several years to come, generating far more than the organization actually needs on an annual basis to fund continued development of Firefox. But here's an interesting thought: it's not an ad. It's simply preferential placement for a link that invokes a third-party service. I keep on being reminded of this by the new 'Skype extension for Firefox', which Skype auto-installed (with my permission) shortly after I upgraded to Firefox 2.0 over the holidays. All the phone numbers in the Web pages I visit now appear as click-to-call Skype buttons. Having all those buttons in front of me is a great advertisement for Skype — but each individual button is not an advertisement, it's a direct link to the Skype service. I can't help wondering how much money Mozilla could make if it struck

a deal to make the Skype extension a default option, and took a micropayment every time a call was placed using one of those Skype buttons.

These two examples I think illustrate how indirect funding of on-demand applications will happen in the future. Less and less is going to be coming from conventional advertising, which in any case is such an old-fashioned and long-winded process: click on an ad, reach a landing page, get some information, ask some questions, maybe in the end place an order. Instead, vendors will embed direct links to paid services in their applications, and they'll get a share of the revenue earned when users click on those services.

High-usage applications will be the biggest beneficiaries. Firefox is a great example of this class of application — masses of users, each of whom use it as long as they're online. It's the applications that users spend the most time using that will be best placed to develop these revenue streams. To a large extent they'll end up as the gatekeepers to everyone else's services so they'll become hot properties and very lucrative for the vendors who own them. But there are issues to resolve, such as:

• deciding which clickable services are most complementary to the application you offer;
• avoiding 'screen clutter' as clickable links compete for users' attention
• preventing browser plug-ins like the Skype extension supplanting links that you've embedded into your own browser-based application.

Despite these obstacles, I foresee a time when revenue sharing for service placement will become a far bigger source of indirect funding than plain old advertising. By extension, I therefore foresee a time when the biggest revenue generator of all is direct payment for services, since that is the pie from which the indirect revenue share will come. So I don't foresee much of a future for ad-funded applications. I think that's going to end up being a very small segment of the overall on-demand services market.