There is an old story about a little boy who was always optimistic. He always found the good side of everything. He drove people crazy. One day his parents decided to teach him that sometimes bad things happened without a good side. So on his birthday they filled his room with horse manure.
The little boy jumped in with great abandon and started searching. When asked what he was looking for he replied, "with all this manure there has to be a pony in here somewhere!"
The search for profits on the Internet reminds me of this story. Thousands of businesses are optimistically digging through the Internet shouting "there has to be money to be made here." Many of them are about as likely to find those profits as the little boy in the story is to find his pony. This is not to say that profits are not going to be made on the Internet. Just that there may not be as many ponies as everyone hopes. And they may take a while to find.
The Yahoo story is one amazing example of this. Yahoo is a wonderful tool. It is a very useful Web index and I, like most Web surfers, use it regularly. But it's never made a dime's worth of profit. Investors have spent millions betting that one day, not to far away, Yahoo will make money. How do they expect that to happen? As far as I can tell, Yahoo's sole source of revenue is advertising. Are the million or so readers a day of Yahoo worth enough advertising dollars to make Yahoo a big money maker? The assumption is that it is. Perhaps they're (Wall Street) right but I will be surprised. Actually I hope they're right because if they are wrong Yahoo may one day go away.
Advertising dollars are well spent if the advertisement is noticed and if it results in sales. How many Yahoo users really notice those advertisements? How many notice enough or are interested enough to push the link for more information? How effectively are that advertisements translating into actual sales? The jury is still out.
There are estimates that by the year 2000, over $2 billion a year will be spent on Internet advertising. The biggest bundle of money spent on advertising so far seems to be on company sponsored Web pages. Studies have indicated that the cost per reader is higher for Internet Web pages then for print, radio or TV advertisements. What advertisers are hoping is that the added level of information provided by these sites will move more people to buy product. Many companies are adding Web pointers to print and television advertisements as well as buying pointer space on other sites to attract readers to this additional information.
Costly as Web sites are, they may prove to be less costly then mailing hard copy materials if they can attract enough readers. If the Internet continues to grow, as advertisers hope, then the cost per reader will balance out. In the mean time valuable lessons are being learned in Web design and using a new medium. In theory anyway.
Besides advertising, selling product through advertising and selling advertising space, there are a number of other paths being pursued to make money on the Internet.
Proving access seems to be the surest path to profits so far. People have shown that they are willing to pay for access. Access providers are serving both individuals and businesses. Margins are getting tight as more companies get into the business. This is after all a commodity business. It is a price sensitive business as people are now able to shop among the start up companies that are springing up across the country. There will be some shake out especially as large national players, AT&T for example, jump into the game. When price starts to settle, service and reliability will come more into play.
Many of the people and businesses jumping on to the Internet are not computer people. They do not want to know the different between PPP and SLIP accounts. They could not care less if their ISP has a T1 or a T3 connection to the Internet backbone. All they care about is that when they dial in a computer answers and they get their connection. When they have a problem they are going to want a real person to walk them through things. Cost, reliability and support will be key. Making money will require a tight balancing act.
Providing tools is getting a lot of media attention. The battle between Netscape, Microsoft Internet Explorer, and other players in the Web browser contest is at the fore of this attention. There was a time when writing a browser was not that difficult a task technically speaking. The advent of add-ons, plug-ins, Visual Basic Script, Java and Java Script and other more involved features of HTML 3.0 and proprietary extensions have changed all that forever. The price of admission has taken a giant jump in the last year. This will only get worse. As the number of features increases the number of competitive browsers will decrease because the cost of development will increase. Only larger, well funded companies will be able to compete. A couple of companies will make money here. Perhaps even a lot of money, but the days of individuals taking a home grown browser and creating a multi million dollar empire are probably long gone.
However, browser company profits will depend on getting consumers to spend money for tools they have been using as shareware. One possibility may be two versions of some browsers a shareware version and a paid version with still more features. This is a model that Eudora is using for their very popular mail program and Forte is using with their Usenet news reader. The trick here is to include enough features in the shareware version to get users hooked and yet hold out enough features to get users to pay for the full featured version.
It may be that the third suggested way to make money on the Internet may work to keep Web browsers cheap for consumers. Companies that make money by providing content will have a vested interest in consumers having the most full featured browsers on the market. They want people to be able to access the bells and whistles that they hope will attract paying customers (paying one way or another) to their sites. It will be in the best interests of for profit content providers to subsidize (in some fashion or other) the Web browser developers.
Access providers also have an interest but it is much lower. They can provide the minimum required software to connect and then let the consumer decide what next level they want bad enough to pay for. Access providers who also provide content, such as America Online, are already making deals with browser makers such as Netscape and Microsoft. This may very well continue into the future.
Providing content is probably the money making option with the most potential for making the most money. These are the people who will ultimately control the destiny of the Internet. There are three ways that content will make money for companies.
One is to provide content that attracts a critical mass of viewers that other companies will pay for advertising space. This is the Yahoo model. This model is being followed by many other types of content providers as well. The news has a long tradition of being funded primarily by advertising money and many news providers have taken their show on the Internet road. Newspapers, magazines, and television networks (CNN being the most famous example). The idea is simple and two pronged.
Most obvious is to satisfy the news junkie (I confess to being one myself) who wants their news right now! Regardless of the time of day. Internet publishing provides this immediacy. There are a lot of these people around and the Internet has attracted a large share of them. These people tend to have good demographics. In other words, they have money to spend. Advertisers want to reach these people and will pay for the privilege.
Internet news media seldom provide all the information on their Web sites that they provide through more conventional means. In effect, the Web site is a teaser that the content provider hopes will attract the viewer and motivate them to purchase the full version. This is particularly true for Web sites created by magazine publishers. Often only part of an article is posted on the Web site. Or the pictures are either left out or present in reduced numbers. The bulk of the advertisements are still in the hard copy version. Publishers give the viewer a taste and hope they'll buy the magazine. This will increase purchase revenue and add to circulation which will allow the publisher to charge more for advertising.
A developing profit source is selling product over the Internet. More then just active advertising to attract buyers to conventional stores, this involves selling where the transmission of orders and payment is the Internet itself. When the product sold is software or information, the delivery of product will often be the Internet as well. We are already seeing this phenomena. As network security becomes more common and trustworthy this style of commerce will only increase.
The Internet is an amazing way to advertise. With current technology on-line brochures involve not only text and pictures but sound and video. The production costs are on a par with conventional multi media production but the delivery costs are low. Not only that but because it is up to the potential customer to demand, via their Internet connection, the information it will be seen by people who are known to be interested in the product. Consumers can view as little or as much of the information as they want and only that much information is transmitted.
I believe that the technical people involved in creating Internet advertising will be a growth field for the near future. Tools for Web page generation, such as Adobe's Page Mill and Microsoft's Front Page, will also experience great demand as they allow non technical (in the Internet/HTML sense) create high quality Web pages. Makers of high quality tools will find demand and profits high.
The third major way to make money with content is by selling the content itself. Companies who have been selling information electronically will easily move their transmission method to the new media. This process has already begun. There is the additional possibilities of content specifically for the Internet for a fee. The so called "adult" market is already moving into this area. Pictures not published in hard copy editions of some "men's" magazines are available over the Internet for a price. If people are willing to pay for this service, and indication are that they are, then this may very well be a booming market. After all, to buy porn over the Internet you don't even have to look a salesclerk in the eye let alone risk a neighbor catching you.
The market for most other forms of content is less certain. Will people pay for access to indexes like Yahoo or search engines like Alta Vista? I tend to doubt it. Creating search engines and making lists are too easy on the Web. There are a lot of people who will develop search engines just to show off. Indexes will develop from the collections of individuals, just as Yahoo did. Free searches and indexes will appear and, even if less useful then paid sites, will grow in use if the market develops.
There may also be some completely new fee based services. For example, I can envision a group of people who conduct searches on-line for a fee. Many people have trouble finding what they want on the Web. As the Web expands this problem will increase even with improved search engines. People who know how to ask the right questions of search engines and who have high bandwidth connections may be able to offer their research skills to a paying public.
There may be other short term windows of opportunity for people to provide services to people who need information from the Web but lack either high bandwidth connections or the patience and skill to fully use the connections they do have. These service providers may provide URLs, email text editions or even hard copy printouts for people who don't know how or want to use the Web themselves. I believe that these markets will probably be short term and last only until the bandwidth of the net expands or until the current generation of children growing up with the Internet reach maturity.
An interesting thing to watch for in the future will be services that cater to people other then the techno explorers who made up the Internet before the Web and during its early introduction. The challenge is to provide services to those who don't want to "do it themselves." That may be a growth market of the future.Note: If you found this essay interesting you may want to check out my Social Computing blog at Windows Live Spaces.
Copyright Alfred C Thompson II 2007