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On advertising’s place in the tech industry

Dave Winer said the way is open for a non-ad-supported tech sector:

The tech industry has been absorbed by the ad industry, and vice versa.
However, there is, imho, still room for a tech industry that is not merged with the ad industry.
In fact, if we want to have a tech industry at all, we’d better invest in the “other” one, because advertising isn’t much to bet on long-term. Seriously.

Daniel Jalkut went further, saying that ads are on the decline:

I’ll take this a step further: advertising is on the way out. Technology loathes a middle-man, and advertising as an industry is the king of all middle-men. The purpose of advertising is to connect customers with companies, so as to facilitate a transfer of money in exchange for goods or services. As time goes by, customers and companies will be more and more capable of achieving this on their own.

I agree with Dave, but not so much with Daniel. As I was writing this post, WPP (the world’s largest ad company) were on the radio announcing a 20% increase in profits worldwide, with an increase in the fraction of revenue they get from digital adverts up to 30%. WPP say that concerns of disintermediation (i.e. the removal of middle-men Daniel talks about) are unfounded. The internet has produced its own new middle men, particularly Google and Facebook. “Traditional” advertisers such as WPP are profiting from advertising with those companies.

Ads can be on the way out, but if that’s a world we want to see, it’s up to us app makers to do something about it, it won’t just happen automatically. Why us? Because the future involves even more mobile internet, and that means that we are in a privileged position to control what customers of the future are looking at. If we want them to look at something other than adverts, we need to put something that isn’t an advert and is worth looking at on their screen.

That’s a world in which many apps will need a very different business model than today’s. There are a lot—particularly on the web and on Android—of apps that are free to users and generate revenue from ads. Those would need to be funded in different ways: I don’t think that the freemium model of “pay to remove ads” will work. It doesn’t solve the goal of reducing ads (every user still sees the ad version at least once), for a start. Also, conversion rates will likely be low as people can “put up with” adverts.

Apps that still want to rely on viral growth still need a really low barrier to entry for new users, but need to change why and how many people convert to a paid version. Companies like Evernote and Dropbox have a model that appears to work for them, where paying customers get extra features/capacity over free users, and provide enough income to support the cost of providing the free product. And then of course there’s the shareware model that’s worked for decades: where the store you’re selling in allows you to do that.

But not all products need to be promoted virally. You can just sell something on the promise that it solves a problem, in the same way that I made a living selling solutions to app security problems, and the Omni Group make even more money selling the solution to the problem of remembering all the stuff you need to do.

You can also sell the promise that people can come back later: that is, you make money by letting customers stick to you. Look at iTunes Match. For some amount of money, Apple manages your music library. Then, next year, they’ll ask you whether you want to carry on doing that. You get the choice between pulling all your music back down and looking after it yourself again, or you can pay Apple once more and they’ll carry on doing it for a year. Apple are betting on there being enough people who come back every year to make this worthwhile.

So, to conclude, app makers who want to see an ad-free world are well placed to make that happen: doing so may start with an uncomfortable review of the way our apps are going to make money. In the short term, it’ll mean having an expensive fully-customer-funded app competing in a world of cheap ad-supported apps. But in the longer term it could result in better, more transparent relationships with our customers who aren’t worried about what data we’re selling to advertisers.

{ 4 } Comments

  1. Daniel Jalkut | March 1, 2012 at 1:54 pm | Permalink

    Hi Graham! I have no illusion that many ad companies aren’t doing great, great business today. I couched my argument in “10, 50, 100 years down the road,” because I think this is an inevitable trend, but I can’t predict the rate at which technology will get us there.

    I wonder how much of that 20% rise in WPP’s profits is based on being closely tied to the robustness of the economy in general. Since the economy has been, by some definitions anyway, improving over the past year, does that essentially guarantee a rise in profits for advertising companies?

  2. Graham | March 1, 2012 at 4:59 pm | Permalink

    Daniel, I’m not sure what the correlation between the strength of the economy and the advertising dollar are. It could be that in a downturn you pump more money into advertising, to improve brand awareness and confidence that you still exist. It could be that when the economy’s bad, you’re more likely to find success as an ad-supported service than a paid-for service. Or those assumptions could be exactly wrong.

  3. Ben | March 1, 2012 at 8:50 pm | Permalink

    My opinion on adertising is that the entire business of advertising and marketing is essential. No, I’ve never clicked a banner ad in my life, I adblock everything, and noscript everything else. But, for any new product to get off the ground, someone out there had to advertise that new product to someone else, whatever medium they chose to do so. I think the real questions, the real revolutions to come is the “how” not the “if”. In the mean time, spammers and purveyors of malicious software will destroy the confidence in any advertising venue that is cheap and easily accessible.

  4. Lee Calloway | March 2, 2012 at 12:30 am | Permalink

    In my experience in the ad industry, the vast majority of companies cut back ad budgets when the economy and demand slips. All agencies I’ve heard from relate soft business to clients cutting back because of the economy. I work for a WPP agency right now.