Making money the old-fashioned way
[UPDATED] We idolize the billionaire geniuses of the Internet, people like Mark Zuckerberg of Facebook, Larry Page and Sergey Brin of Google, and Jeff Bezos of Amazon. We associate their companies with innovation and creativity and, on a technical level, this is true. But financially these firms have not innovated. They have made their money by tweaking the most boring old media monetization models – not old like the 1990’s, old like the 1740’s and 1830’s. For all their technical and managerial skill, these men are simply the ad salesmen and mail-order catalog distributors of the digital era.
You can’t make money selling digital goods.
Out in the real world people make money by selling goods and services of finite supply. On the Internet, you can’t do this. Any digital good by definition has an infinite supply. This is because, in the words of Lawrence Lessig, digital means “perfect copies, freely made.”
Hence the damage the Internet has done to companies such as newspapers, film studios, and music labels that sell goods that can be digitized (words, images, and sounds). Hence SOPA, the attempt by these industries to create legal obstacles to infinite digital supply. You can’t blame them for trying, but in the end they will lose. (I could make an argument that, because of the loss of profits by a range of media companies, the Internet has destroyed more profits than it has created, but I won’t try to do that here.)
Profitable Internet companies are selling physical goods…
There are a few exceptions. You can be like Amazon or eBay and use the Internet to sell goods of finite supply like second-hand bicycles or blenders or e-books (the proprietary software and hardware used to read them breaks the rule of free digital copies). But this use of the Internet is limited and unimaginative. These sites use the Internet to make incremental improvements on the mail-order catalog, an invention dating from the 18th century. Amazon is an online mail-order catalog for one vendor (Amazon itself), while eBay, which is slightly more innovative, is a collective mail-order catalog for a variety of vendors (independent sellers of used goods).
or digital services…
The Internet is not a good place to make money by selling anything that can be delivered digitally, like a movie or song. This means that ventures that seem to be selling digital goods – like Netflix or iTunes – are actually selling a service: the ability to easily locate and obtain a piece of content of high digital quality without the annoyance of searching poorly-organized illegal sites and without the fear of the viruses or annoying ads.
When you pay for services like Netflix and iTunes, you are paying for the convenience of getting a piece of digital content through a well-designed and legal service rather than an inconvenient illegal (or barely legal) one. When Netflix raised its rates and subscribers abandoned ship, many likely decided that Netflix was overcharging for that convenience and, because they could get their content elsewhere, they left.
What are some other successful vendors of services? Facebook and Google come to mind. Facebook is selling you a social environment for sharing content. Google is selling you information curation and creation services. Does that sound somehow off? Maybe because I wrote “selling you services,” when you have never paid for any Google or Facebook service.
To be fair, Google and Facebook are not selling you services, they are selling you. As renowned security author Bruce Schneier said at a European security conference last year, “Don’t make the mistake of thinking you’re Facebook’s customer, you’re not – you’re the product. Its customers are the advertisers.” Google and Facebook attract millions of people like you to their sites and then charge advertisers to put ads in front of you when you are on the site.
There hasn’t been an innovation in media monetization since the newspaper ad.
Yes, Google and Facebook make their billions by selling millions of beautifully-targeted ads. How innovative, how ingenious, how high-tech. Oh wait, no it’s not. It’s the most unimaginative way to make money in the media business. It’s really no different than a TV network making money from commercials. As with TV, on the Internet you buy the hardware (a computer/tablet/TV set). You pay for the transmission service (it’s not a coincidence that TV and Internet services are bundled together by the same provider). Then you get the content (TV shows, web sites) for free.
The TV model of media monetization is actually a little worse than the newspaper model. In the paper era, you also paid for the “hardware” (the paper on which the newspaper stories were printed) and you paid for the “transmission service” (the cost of sending the newspaper to your door, from truck to paper boy) through your subscription to a newspaper. However, these subscription fees went back to the media company that created the newspaper. In the Internet era (as in the television era), the media company only collects the fees from advertising. Fees for hardware and transmission services go to hardware manufacturers like Apple and phone and cable companies like AT&T, Verizon, and Comcast.
Internet companies which provide only services, like Facebook and Google, are parasites on the rest of the economy. They make their money by selling ads to actual companies that make and sell actual goods. They don’t try to create or sell digital goods, because they know that content value is a function of content scarcity, which free digital copying has destroyed. They do provide social and information services, but they give these services away for free. They rely on ads, an old and unimaginative monetization model that pre-dates the Internet while creating an expectation in the consumer they they will never have to pay for any digital good. Truly the Internet economy is run by geniuses!
The innovation is in creation, not monetization.
While there hasn’t been an innovation in media monetization since the newspaper ad there has been an innovation in media production: user-generated content. Social media companies that do make money, like Facebook, are providing the service of content creation in a social context. On Facebook you can freely and easily share text, video, and images that you or your friends have created. This is what brings users to the site… users whose attention Facebook can then sell to advertisers.
A media company based on user-generated content really is revolutionary. To draw on the TV and newspaper analogies again, it would be like a TV network that allows viewers free access to its studio facilities, where they could make television shows for their friends. The viewers could access the television studio for free and the company would make its money from advertisements posted on the studio walls, which the viewers would be exposed to while they filmed their shows. In the example of the newspaper, it would be like a newspaper company allowing readers access to their printing presses to create newspapers for their friends. The readers could access the printing press for free and the company would make its money from advertisements posted on the walls of the printing house.
Of course, this is not a functional business model for TV or newspapers because the physical plant of a studio or printing house is so tremendously expensive. For Facebook, however, the only physical plant they need to maintain in order for their users to make and distribute content is their site, which is a piece of software, and the servers, on which the content of their users is stored, which is why Facebook is rolling in cash.
Where are the Internet’s financial innovators?
These companies are successful, they are profitable, but they are not financially innovative. Now, it is possible that there really has not been a new way to make money off of media since the mid-19th century. Thinkers like Clay Shirky, in his book Cognitive Surplus, and Yochai Benkler, in his book The Wealth of Networks, point to a future where media creation can take place outside the market as user-generated content, created for love not money.
It is also possible that there are genuinely new and Internet-specific ways to make money that have not yet been discovered. There are certainly thousands of would-be entrepreneurs in Silicon Valley and around the world seeking them out. In any case, we can respect the Internet’s billionaires for technical genius or strategic insight, but not for innovative monetization. The economic value of the Internet has not yet been realized.