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Oops, Here Comes the Next Dot-com Bubble

We expect our web services to be free, revenue streams be damned. It’s just like in bubble 1.0.
February 20, 2011
The next few years should be great for people who enjoy popping bubbles (cc) Creativity103

The next time you hear about a web business that will give its product away for free and ‘monetize the eyeballs’ that result, consider this: there is a finite pool of advertising dollars in the U.S., and that pool has shrunk 25% since its last apex in 2007.

That, contends ThingWorx co-founder Rick Bullotta, means every move made by even the most gigantic businesses on the web, including Google, Facebook, Twitter and Foursquare, is an attempt to steal a part of that business away from a competitor. In other words, they’re all locked in a zero-sum game.

(Granted, a large portion of that advertising spend is currently thrown away on television advertisements that customers are becoming cleverer about skirting, so perhaps for the web, if not the media as a whole, it’s not a zero-sum game just yet.)

It’s not just the obviously ad-driven companies that are relying on this model, either, says Bullotta. Of the startups he’s seen, “Most are built on an advertising model, whether directly (from an ad-supported revenue model), indirectly (Web or marketing analytics), or peripherally (content mills for sites making money through advertising).”

But it wasn’t always this way:

In the early days of the Web, the value came from increasing productivity. Information was just a click away, disconnected and segregated processes were consolidated and made whole, and the brick and mortar world moved online to a more efficient electronic platform. The primary resource conserved in those days was time, although who knew then we would fritter it away playing Farmville and Mafia Wars?

Following this logic, we can see that whereas e-commerce was an enhancement of existing economic processes, the ad-supported model is merely a shuffling of the deck – new, ‘social’ media take over revenue from old broadcast models. Nothing much is created in the process other than a new level of connectedness (which has its own benefits but also its pitfalls).

One of the problems with this model is that, other than the pure business-to-business sites like SalesForce.com, there’s no exchange of goods between the businesses participating in it. From the blog of Innovation Breakfast, an event for connecting web entrepreneurs in Boston:

In other, less free-oriented times, entrepreneurial communities supported each other. One small business buys products from another and a network starts to form. The companies start to form their own economy. In a freemium-oriented world, this doesn’t happen. Are we creating a non-economy?

Advertising spend will go up as the economy continues to expand, but that pool will always remain fixed. Unlike Henry Ford, Larry and Sergey aren’t actually building anything that can be monetized beyond the attention economy. Paying their workers more won’t give them more time to look at more ads – and even if it did, it would just dilute the value of each of those ads, as has already been happening as the pool of online ads continues to grow.

What’s the solution? One can hope that at some point or another, micropayments will become meaningful to someone other than journalists and bloggers.

As web developer Alan Thomson noted in the comments of the post on Innovation Breakfast:

I think that the freemium model is simply a product of a rounding error. Until banks make it possible to pay for services on the Internet in pence rather than pounds or dollars, service providers will be forced to round down to free.

Follow Mims on Twitter or contact him via email.

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