Laserlike

Three things are certain in life:  death, taxes, and advertising.

You can add advertising to Benjamin Franklin’s quip that “in this world nothing is certain but death and taxes.”  The conventional wisdom about consumer web firms is that there are basically two ways to build a big business:  (1) attract a massive audience and make a small amount of revenue on a per unit basis through advertising, or (2) attract a smaller audience and make a large amount of revenue through ecommerce.  Put more succinctly, you either need to have a massive audience to whom you can advertise or you need to be an ecommerce company, or you are irrelevant.

Online advertising:  a concentrated market.

A recent Morgan Stanley report on Internet Trends has some very interesting data.  The first striking fact is that Google and Yahoo! revenue accounted for a whopping 61% of U.S. online advertising revenue in the Fourth quarter of 2007 (page 38).  While that number is clearly heavily weighted by search advertising (which is a Goolge / Yahoo! oligopoly), it’s still a striking number.  

Striking, but not surprising.  A concentrated number of suppliers is one way to slice and dice audience for targeting, to limit the number of interfaces with which advertisers and agencies must work (both the online UI and sales representative coverage), and to provide an end-to-end analytics infrastructure that helps me to manage return on investment.  

The report also notes that Facebook + YouTube has more page views than Google or Yahoo! (page 6).   The slide concludes that “Massive Transition in Available Ad Units & Supply > Demand.”  Of course, in information products-based products, supply and demand are easily brought back into balance through pricing.  The likely continued growth in the “supply” of page views (or whatever metric for attention comes next) combined with anemic US economic growth means that ad pricing will likely take a hit. 

The legions of entrepreneurs out there should appreciate just how MASSIVE you need to come in order to build a big advertising-based business.  And to make matter worse, building a content-based business is getting cheaper and cheaper.  The probability of wining this game is extremely low and will only get lower in the coming years, but the rewards are extremely handsome.  Of course, another advertising-based strategy is to keep your costs extremely low and be happy with a niche business or some revenue on the side (if this is a hobby, like blogging or a project with a few buddies outside of work).

Ecommerce: dominated by offline players.

While it is true that ecommerce is a more fragmented market and that you can do extremely well with a fraction of the audience of an advertising-based business (the #1 online retailer, Amazon, isn’t in the Top 10 most visited sites), there is a catch.  Of the Top 15 online retailers, only 2 (Amazon.com and Newegg.com) are pure-play online retailers (Page 29 of the Morgan Stanley report).

While you don’t need the same size audience, you will compete with the entire world of retail — not just pure-play online ecommerce sites.  And many retailers have clearly figured out how to leverage the web.  Having said that, there will likely be more interesting startups in ecommerce than in content-advertising — interesting in that there will be more winners (but the advertising-based winners will likely still be bigger).

Beyond advertising and ecommerce…

There are two other categories of revenue generating opportunities which it seems have been written-off — premium services and virtual transactions.  While both have had limited success in the past, there is reason to be optimistic.  Virtual transactions in social networking (Cyworld) and gaming (WoW) have had success is some applications.  Consumers pay prices that exceed marginal cost frequently (according to conventional economic thinking, defying economic gravity).  Why do people pay a big premium on a ring from Tiffany or a watch from Rolex?  While you may or may not do so yourself, you know the answer to that question.  And if consumers perceive value, there is value —  it makes no difference that it is made from bits rather than atoms (what is the intrinsic value of a $100 US bill?).

Premium services have also enjoyed some, though limited, success.  The Wall Street Journal online is still charging a fee despite over a decade of naysayers arguing that they would need to go free.  Yahoo’s Mail and Flickr properties make revenue on premium services, too.

The internet tax — advertising and registration.

For most consumers, advertising is a usage tax.  It offers little value, adds latency and cognitive overhead to the user experience.  Since firms make so little on advertising on a per-customer basis, customer support is limited.  But because signing up for premium services (and virtual currency) on a site by site basis costs money and takes time, most consumers choose not to do so.  

Another usage tax for just about every web site is registration.  Why do sites require registration?   There are two reasons, one of which is legitimate and the other is not:  (1) so that they can target advertising and content to you, and (2) so they can authenticate that you are a real person, not a bot.

The promise of registration is that I will get better content by giving the site information about myself and allowing it to track me — with few exceptions (Amazon.com), sites fail on the first reason.  On authentication, sites do need to make sure that I’m a real person so as to limit the chances of several million daily Gmail registrations by one person and a bot for the purposes of flooding the web with SPAM.  The problem with this is that SPAMMERS are very good at breaking most authentication schmes  And the harder you make it for spammers, the harder you make it for consumers.  This has lead to a number of actions which hurt user experience (e.g., web-based mail limits on messages sent per day, attachment size).

Idea:  Unifi — Cross-firm Premium Services Packaging and Virtual Currency

1.  Offer universal registration.

By cutting deals with content sites throughout the internet, you can solve both registration objectives through centralization.  Since you will be charging every customer for premium services (see point 2), you will have their credit card on file.  This, along with other one-time registration information, will allow for world class authentication.  And since consumers are paying for a “premium services” package, you have no need to target ads and special offers to them.  

2.  Would you like the basic package, the Gold Package, or the Platinum Package*?

Cable packages allow you to select the package of channels you would like in exchange for a monthly fee.  We will offer basic services (no advertising), a Gold package (add IMAP mail, no limit on attachment size, high-quality photos in your photo sharing, etc), and the Platinum Package (how about customer service that actually works?).

 So why will this work across sites when it has more or less failed on a one-off basis?  Imagine ordering cable by negotiating a deal with every channel?  Bundling has huge advantages for all involved.  The challenge would be figuring out how to share revenue with partner sites.  

You could do it on a page view basis or some other equally distributed attention metric.  Or, you could get really fancy and allow consumers to pick the services they value most to create their own bundles (e.g., “I will take one Gmail no attachment limits, one Flickr pro account, and one five free downloads from iTunes each month”).  Service providers would accept our virtual currency as payment and convert our currency into real revenue each month.

3.  Virtual currency, across the web.

Like premium services, virtual currency is something that benefits from bundling.  If I can earn currency in a game on Facebook and spend it on a game on MySpace (or premium services at Yahoo!), virtual currency might actually work.  

Work a deal with American Express to have an exchange rate between our currency and airline miles to turn virtual currency into real currency.

*Note:  You may argue that this idea is inconsistent with my argument in a post a few weeks ago on cable.  As  the great Ralph Waldo Emerson said, “A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.”