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The economics of the ad-funded web

March 28, 2009

Why should we have to pay for information and services we receive over the internet?  I have never had to pay before now for things like Facebook, Gmail or Twitter.  I can use Spotify for free.  I have not bought a newspaper for years, but can still read The Times and The Guardian every day.

Right?

Well, I am quickly coming round to the view that this is not nearly as simple an argument as people make it sound.  I think we may have this one wrong.

Here is a confession: I would rather pay £10 a month to use Spotify without adverts.  Why?  Partly this is aesthetic – I just don’t want my playlists interrupted by sponsors’ messages.  But there is also an economic angle – since I am unlikely to buy  many CDs ever again, Spotify will save me much more than £10 a month.  So why on earth would I complain about paying for such a brilliant service?

Yet people feel very strongly about this – why should we pay for something when we got it for free before now?  The truth is, there is no such thing as a free service.  We pay for the services we value, one way or another.  In the main, these services are ad-funded, meaning that some brand is actually paying for its delivery.  They are not doing this for free.  Every time you buy that brand, you just paid for the so-called “free” service too.

What’s wrong with this?  Two things.  If I am a consumer of the brand in question, but not the net service, why should I fund both? Better I pay for what I use.

Secondly, this approach is inefficient. The way to ensure consumers get the best deal is to have price transparency and competition.  If a net service is ad-funded, we have no way of knowing whether the brand is striking a good deal or not.  The problem for consumers here is that, if the brand pays more than it needed to advertise, the only losers are that brand’s consumers, who end up paying more.  And the only winners from this are the owners of the “free” service. The money is flowing from my wallet into their bank account.

I’d rather just pay for what I use, thanks.

(Hat tip to my friend @masoke who got me thinking about this via a 140-chars argument on Twitter!)

Update: Someone pointed out this all-encompassing “how to” on getting paid for online content, and it cited an excerpt from the brilliant Time magazine article on micropayments for newspapers that got me started in the first place: “One of history’s ironies is that hypertext — an embedded Web link that refers you to another page or site — had been invented by Ted Nelson in the early 1960s with the goal of enabling micropayments for content. He wanted to make sure that the people who created good stuff got rewarded for it. In his vision, all links on a page would facilitate the accrual of small, automatic payments for whatever content was accessed.”  He got it!

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3 comments

  1. I’ve thought about this since I was forced to agree with you on Twitter. You know how I hated that.

    The first point about your willingness to pay £10 a month, I think, is a moral argument rather than an economics one, and one I also employ. In ‘the current climate’ I’m not spending less, but smarter. For you, Spotify is a better service than any offering ‘ownership’ of music. I’d agree if I could use it away from my computer (I’d love it on my PS3, and would instantly sign up). Your £10 is a pledge of support for a start up as much as a purchasing decision

    I have four problems with your ‘ad-funded isn’t free’ argument:

    1. Brand consumers pay for services through ads, whether they use them or not. I don’t use MySpace or GMail, and to an extent I pay for them. That’s fine, I use other web services, but in total do I pay more in the extra cost of my shopping than I’d pay in various subscription charges?

    2. It is predicated on the fact that brands that are unable to advertise on these services will cut their prices by the spent amount. That is highly unlikely as companies decide it would give them a bigger margin (cf. cigarette companies since the ban), or advertising spend would go up as brands seek more experimental ways to differentiate themselves from their competition.

    3. Would I have signed up to pay £5 a month to Twitter before I knew I loved it?

    4. On the inefficiency of the ad-spend. I’d suggest that the only way you’d know if an ad is money well spent is through the market. Are TV spots during the Super Bowl more effective than those at other times? If not then why is there such a premium? Because this is the price dictated by the market.

    Sorry – comment longer than your post.


    • 1. I am wedded – probably incorrectly! – to a simple idea here: do you end up paying more for a product because it advertised on a website? Well, yes, you do. Otherwise, it would be the shareholders who paid for it, and that is not the way these things work.

      Your other points are great. I don’t quite agree with 2. It seems to me cost savings would be passed onto consumers in a competitive market? You could be right if the price is inflexible for some reason.

      3. Good point. Though Spotify overcomes this nicely.

      And 4? Yeah, point taken. My argument is a little ragged there.

      I still think online services in general could learn from Spotify by offering a choice between ads and no ads. There are no doubt other, better examples, but this is the one I know (and love!).


  2. […] bloggers have learned the skills of the journalist, and earn money from their blogs through the blunt tool of advertising. The smart solution for newspapers and blogs will ultimately be the same – getting paid for what […]



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