(Host) When Digital strategist and commentator Rich Nadworny looks at
some of our new online businesses, he’s reminded of the Dire Straight’s
song: Money for Nothing. But – he says – the clicks aren’t free.
(Nadworny)
Imagine that you decide to open a cookie factory because you bake the
best chocolate chip cookies in the world. Since everyone loves your
cookies, you decide to give away your cookies for free. People will love
eating your free cookies; they’ll talk about them and crave them. When
people want to bake your cookies themselves, you give away the recipe
for free.
A year into your cookie business, you decide that you
need to earn some money. You’d like someone like Sara Lee or Freihoffers
to just buy you out. In the mean time, you decide that you’re going to
embed a digital chocolate chip in each cookie, so that every time
someone bites into one, an audio ad or a hologram ad will play. People
will have to watch ads in order to eat your cookies. Instead of selling
cookies, you sell ads.
If you pitched a bank or a venture
capital company on this business plan, they’d laugh you out of the
office. And yet, that seems to be a winning approach for many online
companies.
The biggest story on Wall Street this year is
Facebook’s failed IPO. The fabled online company went public in the
spring, and since then, the price of the stock has gone down by half.
Facebook has annual revenues of about $1.5 Billion, not too shabby, but
investment bankers have valued the firm at $100 Billion.
Facebook
makes all of its money on advertising. Yet none of us, who go on
Facebook and use it daily, do so because we like seeing Facebook ads.
The ads have nothing to do with the experience of Facebook. The revenue,
the advertising is based on that great dot-com-era term "eyeballs." The
thinking is that the more eyeballs, the more money you can make showing
terrible online ads.
Compare this with Silicon Valley and Wall
Street darling Google. Google makes all of its money on online ads too.
But its ads fit perfectly into its core business: Search. When Google
sells you ads, it’s to allow you to show a search ad on a search page.
It makes perfect sense.
This year Facebook bought the photo
social network Instagram for $1 Billion. When someone asked the
Instagram owners how they make money, they replied, "That’s a great
question. We do not."
Facebook has about 950 million users.
Imagine instead if they charged users only a quarter per month to use
their service. For a price of one Starbucks latte Facebook could
quintuple their income. Even if half of its users dropped out, they
would still triple their income.
I have to believe that making
something great, and charging a fair price for it, is good business. But
I‘ve yet to meet anyone who thinks that what we really need is more
advertising. So I have to wonder why this approach is making so much
money for a few venture capitalists and online entrepreneurs.