Feature: Ad-supported software

Advertisements make free-to-air radio and TV viable, and they're a boom industry online. As the Web 2.0 world expands, will business apps be next?

Forget the economic downturn: Internet Advertising Bureau figures suggest that Australian advertisers spent $1.5 billion on internet ads in the year ending 30 June: a 27 per cent increase over the previous year.

With consumers spending more and more time online, commercial messages are making their way into every corner of cyberspace and even, if some companies have their way, into the very applications that run your business.

For many companies, the idea of selling advertising space on corporate desktops is wrong in so many ways that it doesn't even bear discussion. Years of evolution have gotten large organisations used to owning their own applications, after all, and after shelling out hard-earned money, the last thing most users want to do is suffer through a constant stream of online ads.

"Larger customers want to pay a little bit and get full control of their applications," says Harvey Sanchez, online services lead for Microsoft Australia. "They don't want users clicking on ads all the time, and they don't want their apps to be hosted anywhere; they want to control the hosting and management of their apps."

Yet as more and more businesses turn to embrace Web 2.0 services, and emerging Web 2.0 giants slowly but steadily make inroads into the small and medium business (SMB) market with free business applications, the possibility of extending advertising models into these applications is looming just over the horizon.

Microsoft, Yahoo and Google, whose battle for online eyeballs continues to dominate the Web 2.0 agenda, have already tested the market by successfully building advertising into their respective free email services, and Microsoft also peppers ads across many of the rest of its Live portfolio of consumer-focused services. Google's Gmail service was created from the ground up around discreetly inserted advertisements, and Yahoo followed suit in mid-2007.

With tens of millions of users, it's clear that consumers are happy to tolerate a bit of advertising in exchange for free access to the services they need. And while the top end of town is certain to spurn the idea of advertising space on its core applications, Microsoft and Google are testing the pain threshold for cash-conscious SMBs keen to keep their overheads as low as possible.

Advertising economics
Microsoft's decision to offer its Works productivity software on an ad-supported basis was a major step in this direction. With Google's rapidly evolving Google Apps online productivity suite dropping the price of entry-level applications to zero, Microsoft had to parry, and last year reportedly began planning to experiment with Works, a low-powered version of its flagship Office suite that has long been bundled with new PCs.

There was more to the decision than just a desire to compete with Google, however: as far back as 2005, Microsoft was already noting flagging sales of consumer software spending as a sign that radical new approaches were necessary.

The company was only making a couple of dollars for each copy of Works bundled on new computers, so shifting it to an advertising-supported model made economic sense. Ad revenues, after all, are ongoing and long-term, while one-off software purchases deliver a certain amount of instant profit to the software vendor and nothing more.

"There's a lot of money in the advertising pie," says Microsoft's Sanchez. "It's important to look at how we can play in that space; we can probably make more money out of advertising revenue than we can out of the royalty based licensing model."

Just how true that is, however, may depend on the product being offered; if the experience of Qualcomm is anything to go by, the shift to advertising-supported software is actually just one step on the long road to obscurity.

Qualcomm's Eudora email client, extremely popular but gradually made redundant by free online email services and the ubiquity of free applications like Microsoft Outlook Express and Mozilla Thunderbird, was released using an advertising-supported model in 2000 before it was finally discontinued in 2006 and handed to Mozilla and the open source community.

Whether or not Microsoft will eventually open source Works is anybody's guess, but it's clear that advertising-supported client applications have done anything but soar.

SpeedBit's popular Download Accelerator Pro still uses ads in its free version, for example. But GlobalSCAPE's CuteFTP, a shareware application which once embraced the ad-supported model, eventually moved away from it and now charges for the product despite a slew of equally capable, free competitors.

Vendors pushing advertising-supported software have had to fight the association of legitimate advertising-supported software with "adware", which has regularly been associated with the far nastier "spyware" and tinged with implications of nefarious intentions.

Users are already well acclimated to seeing advertising online, however; could this undo the stigma of adware and provide a fresh start for companies using advertising to offset the costs of delivering ever more feature-rich Web 2.0 applications?

Not necessarily, says Alan Noble, Australia and New Zealand engineering director with Google, which has extended its Gmail advertising experiment to a number of its other business-focused applications.

"At the end of the day, we offer a menu of ways to pay for the products," Noble explains. "You either pay directly in the form of a subscription, or pay indirectly in the form of advertising. Right now, we are focusing on the subscription approach. It's really a function of your business requirements."

But will SMEs buy it?
Ultimately, these business requirements, which most vendors see as getting as much software as possible for as little money as possible, may push many SMBs to accept advertising as a trade-off for access to emerging Web 2.0 services.

Many small businesses already rely on Google Spreadsheets, for example, if only because it facilitates collaboration by allowing many users to work on a spreadsheet simultaneously.

Still others are embracing advertising-support software like SpiceWorks, which claims more than 400,000 users of its network management platform. Such capabilities are well out of reach for SMBs who struggle to justify the cost of commercial network management products from the likes of HP, BMC and CA.

Yet there are issues for SMBs to consider before they accept ads with their business applications. Ads create a significant unknown in the workplace with employee time-wasting, management overhead and security risks including the potential insertion of malicious code or deceptive ads designed to trick employees into revealing sensitive passwords and other information.

Then there's the more substantial risk of corporate information being compromised by the same behaviour-monitoring, ad-personalisation code that gave adware such a bad name.

Of course, companies are already managing such risks when their employees surf conventional websites, so building ads into online corporate applications wouldn't be a big step in that respect. It would also, Sanchez points out, help SMBs sidestep many of the dangers of piracy, since cost-sensitive businesses would no longer feel the need to risk fines and security issues by using illegitimate software.

Indications are that some customers are warming to the possibility: one survey last year, by McKinsey & Co. and Sand Hill Group, found that fully one-third of 475 surveyed IT and business executives were planning to be using ad-funded software by 2009.

Ultimately, experimentation and evaluation will lead SMBs to decide whether ads on their employees' desktops are a fair compromise for lowering the barriers to entry for Web 2.0 applications.

Conventional software licensing certainly continues to be the favoured approach, but with so much online advertising up for grabs it's likely that the market will see more advertising trials in the future, particularly as businesses really start embracing the possibilities of Web 2.0 for their businesses.

"Users are seeing value in these collaboration and communication features, and they're wondering why they don't have those capabilities in their business applications," says Google's Noble.

"It's good for businesses to be able to take advantage of the same things that are available for free on the internet, and there are going to be early mover advantages for businesses that do. If you're not looking to move business applications to the cloud, increasingly you will be saddled with inefficiencies and costs."