Power to the people
An enormous advertising industry built up around TV, major corporations and advertising agencies in the 20th century. But the so-called content companies in this era were actually distribution businesses. And the distributed and networked architecture of the internet (and web) limits audience aggregation compared to the industrial mass media model. This causes significant problems for business models reliant on the architecture of the mass media industry.
Re-architected distribution effectively shifts power to the nodes of the network, or the people experiencing the product. Today, if a product does not meet the needs of its users it will be ignored for another product. And an ignored product cannot monetise attention.
User experience is the paramount consideration
This places the user experience as the ultimate consideration for any digital product or branded experience.
The user has abundance of choice and scarcity of attention: if she is aware of two products that seek to solve an identical need she will choose the product the provides her with the best experience.
This logic makes sense in the context of design-based competitive advantage.
However, the user experience does not solely relate to product design. A user's experience is also the function of business model design. The way a company funds its existence necessarily impacts the user experience.
The teachings of a Zen master1
This situation is the contemporary business model design challenge: how to design a business model that serves the user experience as the primary consideration?2
Steve Jobs' gift was his sensibility and focus that allowed him to strip back products to their essence or "raison d'être". To perfect by purging a product of all but the purest elements. But Jobs was never forced to re-design the business model, only the product.3 Ultimately, circumstances never required it of him while he had the power to do so.
Who is the Zen master of business model design today? Which company will chose to design the purest business models that serve the needs of users? What role does advertising play in that design? How much privacy do users need to transact to obtain the value?4
The fundamental flaw of an advertising model
The fundamental flaw of an advertising model is that organisational or business incentives do not necessarily align with user interest: problematic to the user experience over the long-term.
An advertising business model is by definition multi-sided. This model can never be perfect because at some point along the spectrum the needs of advertisers are relevant. So this ad model will always and necessarily be at risk to a single-sided model that manages to perfect its product and business model design mix.5
The Google advertising model
The Google advertising business model is best summarised as services in exchange for data.
The model obviously works from a financial perspective. Yet the Google advertising model is not Zen as I define it above because organisational incentives cannot always align with user interest.
At what point do the needs of advertisers come before the needs of users? Google hasn't hit that tipping point, perhaps because it is controlled by idealogical founders who value computing innovation above revenue. But there is a balance and scales there: business change organisationally overtime even with culture baked in. Google could be run by sales at some stage at which point user interests are secondary.
The Google advertising model also faces logistical problems. There are hidden costs to the user from an advertising supported services model that aren't apparent to the user. The user is transacting with their privacy, which is problematic in an age in which legal/political systems are converging against the interests of the individual. Privacy rights are at present contractual (party-to-party) which means individuals cannot control jurisdiction. This can make contractual enforcement prohibitively expensive for the individual.6
The native advertising model
Native advertising challenges what is defined as advertising. Content, media, sponsorship and advertising are all converging into one malleable property or experience.7 At least the lineage of advertising from TV (compared to classified).
The native advertising model gets close in many circumstances for "media" products, but it is still flawed because it is multi-sided. It may be possible to create a media product that is personalised to the extent a user only receives sponsored material she wants. But the incentives at a structural level prevent this from happening in every and all instances. The organisation is incentivised to maximise advertising revenue, so the product must start to present marketing messaging that people would not otherwise want. Otherwise it can't create a market for advertising.
There are examples where the balance is well served (Instagram, probably not Twitter, content that people want that is also a paid brand story). But other needs such of those of Wall Street (in the example of Twitter) can still derail a product supported by native advertising.
One consideration is ownership of an entire digital media experience. For example, Red Bull Stratos or the Lego Movie.
Advertising revenue is finite
Finally, advertising is a kind of proxy of GDP, so its a finite sum of money. Is there enough advertising money in the world to fund all of the computing, web and cultural/media opportunities that are possible today technically? If the answer to this question is no, then the model limits.8
1. In this case, I use the word rather as a crude euphemism meaning purity or perfection, rather than its strict meaning. I hope Buddhists reader will excuse my creative license.↩
2. This is a challenge that we're actively pursuing at The New Pop relating to brand marketing. I will post more about my views on the production, distribution and commercialisation systems for marketing brands at a later time. Also relevant is my treatise on the the converging media environment and its impact on marketing strategy: converging media Part I and converging media Part II.↩
3. There is a worthy discussion here about horizontal versus vertical business models and the struggles between Apple and Microsoft in the 80s and with Google today. Ultimately, this isn't relevant to this post but I recommend Stratechery on this.↩
5. It is noteworthy to mention WhatsApp at this point. Did Facebook purchase WhatsApp because it offered insights into an alternative business model than advertising? For more analysis of this, listen to Horace Dediu on episode 112 of The Critical Path. Also relevant is this post by a co-founder of WhatsApp: Why we don't sell ads.↩
6. This situation must create a market for "privacy" focused solutions in the future. WhatsApp is sort of an example of that.↩
7. I will post more about converging media in future. I also recommend my treatise on the the converging media environment and its impact on marketing strategy: converging media Part I and converging media Part II.↩
8. Horace Dediu deserves another mention for posing this question first on episode 112 of The Critical Path.↩