Advertising on the Internet supports the free content
The arms race over software that can block ads from appearing on websites is heating up again, generating a frenzy of overheated rhetoric about the impending death of the Internet. If no one views ads, after all, advertisers will stop paying for them, and without ads the largely free content of the Internet has no visible means of financial support. And while some of us write simply because we can't stop ourselves, sooner or later everyone in the content supply chain has to earn a living.
The current fight isn't just about who pays the Web's bills. The ad-blocking war is a symptom of several larger technology-driven disruptions in mass media I've written about before, notably the shift of video content from networks to the Internet and the rise of user-generated content that comprises the entire value of services such as YouTube, Facebook and Twitter.
Not to mention cutthroat competition. In a widely-shared article last week, Verge editor-in-chief Nilay Patel noted that ad-blocking support built into the latest version of Apple's mobile operating system is targeted at the heart of companies who give away tons of information in exchange for the right to serve up ads. Companies like, you know, Google -- Apple's archrival in the increasingly dominant mobile sector.
Apple, of course, makes its money not from ads but rather from hardware and paid content. But even if Apple's motives are more self-interested than simply helping its fan base enjoy commercial-free content, the company is tapping into a deep vein of buyer's remorse we consumers share over a Faustian bargain made long ago with ad-supported media. Before free websites on the Internet, broadcast radio and television reached their apex on the backs of commercials. And before that, newspapers had long been highly subsidized by classified and other advertising, which is why print is dying out as advertisers relocate to other media, including the Internet.
Thanks in large part to digital technology, there are now plenty of other models for generating revenue in the information business, including subscriptions (Hulu Plus), all-you-can-eat (Netflix) and pay-as-you-go (iTunes) plans, bundles, a la cartels and even mandatory taxes, as in the UK and many European countries, where households are required pay for national channels such as the BBC.
Information revenue models are splintering further, with innovators experimenting with all manner of hybrids and fine-tuned options. Right now, I'm listening to my Elvis Costello playlist on Spotify, for which I pay $5 a month to keep the stream free of commercials. And in the car this morning, my local NPR station was wrapping up its semimonthly (or so it seems) "pledge drive" to guilt people into paying whatever they want for mostly ad-free programming, even though no one has to. (Public broadcasters also rely on corporate and charitable donations, as well as a diminishing amount of taxpayer support .)
But there's a reason advertising has been the dominant model for so long. Information-based products have some unusual economic properties that make it both difficult and counterproductive to charge users directly. Like other so-called "public goods," the cost of producing valuable information is entirely upfront, in its creation. That's especially true for digital content. The cost of broadcasting the signal or serving up the bits to you -- what economists call the marginal cost -- is essentially zero. In the case of the Internet, you pay for the device and the network connection.
That means content producers have little reason to spend money trying to exclude nonpaying customers, and, indeed, some powerful incentives not to. Not only is the marginal cost of supplying additional viewers zero or close to it, but another economic principle makes information more valuable the more it's used. Media that is popular exhibits a kind of gravitational pull, accelerating its appeal in what is known as a "network effect." Allowing if not begging users to share links through social media for the material they like -- a virtual water cooler -- helps that content find its largest and most interested audience.
In effect, producers outsource the advertising about the content itself to the users, maximizing the indirect revenue they can then collect from advertisers. And network effects are essential for information producers. Most songs, television shows, books and posts never make back the cost of their production, but a few blockbusters can carry the load for an entire magazine, website, channel or network. My first book sold almost 200,000 copies; the second fewer than 10,000. Both cost the same to produce.
Indirect models for making money, especially advertising, reduce the drag on network effects that would come from trying to charge each individual user a price that matched their particular level of value for a particular piece of content.
Advertising works. Except, of course, that everyone hates it. Including advertisers. "Half the money I spend on advertising is wasted," 19th century retailing pioneer John Wanamaker was reputed to have complained , "the trouble is I don't know which half." When ads are simply broadcast alongside general-interest content, it's bound to reach consumers -- perhaps most -- who aren't the least bit interested in the product or service. And that it turns feeds a culture that has come to hold advertising in contempt -- even though production values for the ads are often higher than for the content itself.
What's changed? Until the dawn of the digital age, neither the advertisers nor consumers had tools for reducing the vast inefficiencies of the ad-based model. You could toss the auto and real estate sections of the newspaper, or use TV commercial breaks to attend to biology or refresh your chip bowl. On the advertiser side, Nielsen and others could sample and focus group small proxies of consumers to guess what was being watched and why. But consumers didn't have a way to block the ads, any more than advertisers had a way of targeting them just to those who were likely to respond.
Both sides are now arming themselves with more advanced weaponry. Dish Network's Hopper famously allows viewers to easily skip over commercial breaks, perhaps encouraging the return to embedded product placements. Likewise, as Apple and others increasingly support ad blocking software online (for whatever reason), content providers will be driven to up the ante and make it harder for that software to work. Remember pop-up ads on websites? Web browsers figured out pretty quickly how to stop them. But that just inspired more innovations in ad delivery technology.
Let's not kid ourselves with magical thinking. If either side actually wins this centuries-old war, the result will be mutually-assured destruction. Those who use ad-blocking software are gaming the system -- taking the quid of free information without returning the pro quo of seeing the ads. Even if they aren't breaking the law, they are cheating; relying on the rest of us to keep the game going.
The system can only tolerate a minimal level of so-called "opting out" before the advertisers flee again. If that happens, producers will surely resort to alternate and less efficient forms of revenue-generation, such as paywalls. Ultimately, there's no such thing as a free lunch, even a virtual one.
The real resolution to this fight may come from another set of innovations -- although whether they arrive in time is far from clear. As I wrote in my 2009 book, " The Laws of Disruption," the plummeting cost of collecting user and contextual information means broadcast-style ads are giving way to more focused advertising -- one of many fast-growing applications of so-called "big data" analytics. Targeted ads largely solve John Wanamaker's problem, serving up specific offers for products and promotions just to a category of users who are likely to be interested. (They may appear to be personally directed to you individually-but that is largely an illusion.)
Though such ads, on a visceral level, may offend our sense of privacy, they keep us from seeing commercials that truly waste our time and the advertiser's money -- the ads we ought, in principal, to be more annoyed by. Put another way, advertisements are offers. Those that are perceived as commercials are offers that are at least slightly off target. But an ad for the right product or service, offered at the right time to the right person at the right price, isn't an ad at all. It's a deal.
As the implicit and long-standing truce among content users, media producers and advertisers is renegotiated over the next decade, in any event, expect to see plenty of innovative new ways to monetize information. Most, as with innovations generally, will go nowhere. The future, however, is almost certain to be less monolithic, with different consumers opting for different ways of paying for information, perhaps depending on their device, location, or the kind of content being enjoyed.
But don't fall into the smug trap of seeing advertising as a scourge that can at long last be wiped out by technology, leaving consumers to live their lives in information Valhalla. One way or the other, someone has to pay for the fuel that keeps the innovation engine humming. Compared to the alternatives, ads may prove to be the least offensive-and most efficient -- solution after all.
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Downes is co-author with Paul Nunes of "Big Bang Disruption: Strategy in the Age of Devastating Innovation" (Portfolio 2014). He is a project director at the Georgetown Center for Business and Public Policy.