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Should Your New Web Business be Ad-Supported?

Contrary to popular belief, the ad-supported model for a web business is very, very hard to succeed at. I've underestimated the difficulty of living on ads a couple of times in the my investment career. Wouldn't want you to do the same either as an investor or an entrepreneur.

Google, of course, is advertising-supported and is a huge success; that's bad news for you - and Yahoo and Microsoft. Google is consuming most of the free oxygen in the ad-supported cave. If someone wants to buy keyword-driven ad inventory, they go to Google. Why should they bother going anywhere else, especially to a startup very few page views? If you want ads on your service, you'll have to sell them or get them from someone else who is selling them. No matter how neat your self-help ad engine is, no one except maybe your mother will try using it UNLESS you open the way to a significant new market AND can prove that.

OK, you say, people won't by ads from me but they'll buy them from Google. I'll create the page views with my wonderful new service and Google'll put the ads there. Google'll put ads anywhere. Yeah, but. Google will put ads on your pages; some people will click on these ads (Google charges for and pays for clicks in case you've been living on Mars and missed that). You will get a small stream of revenue; it won't bring you anywhere near breakeven. It won't impress potential investors. In fact, the trickle of revenue you get from Google might even convince potential investors that you CAN'T make a living with ads; no ads and no revenue might leave them easier to convince.

Google ads are fine for harvesting ADDITIONAL revenue. Bloggers run them because any revenue is nice; but most bloggers aren't trying to make a living from their blog or attract investors to it. If your website sells something, it makes all kinds of sense to sell additional related somethings through Google ads or Amazon ads (which you can better aim at your customers). If your website has some spare space, Google ads are something people are used to looking at and they'll make some spare change for you. But they won't make your business model.

Maybe there's a counter-example (if so, please post it). In theory, I thought, since Google does such a good job of keyword targeting and increasingly good job of geo-targeting, a well-defined site that viewers come to for well-defined reasons (not an eclectic site like Fractals of Change) ought to be able to induce the Google bot to send just the right ads to attract many clicks at a high price per click. But I haven't seen it happen that way.

Besides Google there are ad networks which will actually sell your site to advertisers. Professional blogs do get a great deal of their advertising from networks like Federated Media (FOC is a small blog using FM). But it's tough to get the attention of a good ad network if you don't already have good demographics AND high viewership. Even if a network takes you on, their salesmen aren't going to be able to do much for you unless you have numbers big enough to get their attention and the attention of the advertisers and agencies they sell to. If your content is powerful enough, you might make a living with agency ads – but it's a long shot if you're not BoingBoing.

Whether it's Google or an ad network, whoever sells your ads is going to have to keep a lot of the revenue to pay the selling expense. It's highly unlikely that they'll be enough left for you to run your business on.

The bottom line is that you have to have way to sell ads if you're going to support a service on advertising revenue. Sell as in actually convince somebody to buy something, not just take orders. Selling ads nationally means having existing contacts with people who buy ads nationally AND having such a hot property that they'll pay attention to you. Selling locally means feet on the street walking into stores and helping to build local campaigns. Radio stations know how to do that; you probably don't and probably can't afford to hire someone who does. The easy local ads were the classifieds because the newspapers didn't sell them, they just took orders. Craig and his List jumped quickly into that huge niche. Almost inconceivable that you'll make money there.

If you have a better way to sell ads, then maybe you should start an ad-supported service. If you just have a better service, you probably can't support it on ad revenue alone.

Ning: Have Your Own Social Network – It’s Free

Even if you have your own social networking website, you probably won’t get as rich as Mark Zuckerberg who just sold a paltry 1.6% share in Facebook, which he founded in college a few years ago, to Microsoft for a cool $240 million; that’s the bad news. The good news is that you don’t even have to be rich or even well-to-do to have a social networking site of your very own. Ning will give you all the tools you need to build your own site “for free in seconds.” They’ll even host your site free-of-charge. What’re you waiting for?

“Why do I want a social networking site of my own?” you ask. If you’ve been reading the wrong blogs and have been hiding from Newsweek and BusinessWeek, you may even ask “what’s a social networking site?”

Social networking sites are cyber-places where people cyber-chat about themselves and their friends, post pictures and videos, and “network” with old friends while often hoping to make some new ones. Think of them as Rotaries online although they don’t usually have the social services aspect of a Rotary and don’t even offer lunch let alone make it mandatory. Not surprisingly, high school kids hang out in certain social networks, college students in others, and people from different cultures hang in different networks. Fashion is a part of network popularity – witness the recent meteoric rise of Facebook.

Part of the success of the big networks is that they are hosts to many subnetworks, groups of people with common interests as well as overlapping networks of friends. In the happy phrase of Dr. David Reed, they are Group Forming Networks. If you want a place to network with the members of your flower club or your former junior varsity swimming team, you can create a group on Facebook, for example. You can even divide this group into friends and not friends and share more information about yourself with some people than with others.

Which brings us back to Ning and forming your own social network. Most of won’t do this on our own – but we may well want to create a social network as part of a real social organization we belong to or in order to create a social organization for people who are too geographically dispersed to meet in person or for simple business reasons to promote a product or a service. It’s worth thinking about – especially since it’s free and not even very hard. Technical skills are not required.

You can create your own group (free) on Facebook if you want to – but you can customize and focus the online experience on the activities of the group on Ning in ways which you can’t do on Facebook. BTW, the downside of such customizing is that the people who join your group will have to learn how it works and how to navigate through it. If it were a subgroup on Facebook, those who already know how to use the larger service would be instantly at home.

You can create an open Ning network which anyone can join; you can reserve approval of those who join; or you can make it invitation only. You can have a network all by yourself if you want. (BTW, I have a network of which I’m the only member. Can anyone think of any reason other than dreadful unpopularity why I’d deliberately set that up?)

Ning hosts your network free as well. That means they run it on their computers, use their storage (up to five gigabytes), and their Internet connection (also with limits) on your behalf. They do messy things like backups and system upgrades. Currently there are over 118,000 social networks hosted by Ning, according to the company, although some, of course, are dormant or very small like mine. Impressive growth since the company was founded in late 2004.

How can they do this? Why do they do this? Easy: like many Internet services, Ning’s free service is supported by ads which Ning sells. All the ads I’ve seen are Google ads which is yet one more illustration of Google’s success in enabling others to get ad revenue without an advertising sales force. Eventually, with enough page views to offer and enough information about the viewers of these pages, Ning may decide to cut out the middleman and sell ads directly; but, meanwhile, they’re part of Google’s growth.

Also like other Internet services, Ning also has a paid version: if you want to run your own ads (and keep the money) or don’t want any ads at all, they’ll host your social network for just $19.95/month. For slight additional monthly fees you can get more storage and bandwidth and you can use your own web address instead of something.ning.com.

If your organization doesn’t yet have an online presence or has just a minimal, non-interactive website, this is an alternative you should consider. It’ll cost you many thousands of dollars (and may be worth it depending on what you’re doing and the professional who helps you) to get a professionally designed website without Ning. Hosting is also not usually free. In theory there’s a risk that Ning could go under financially and take your website with them but that’s a very small risk; they’re both well-funded and well-founded (co-founder is Marc Andreessen, co-author of the Mosaic browser and founder of a few successful companies since).

Previous post about Facebook is here.

LocalReplay PrePlayed!

LocalReplay, a stealth-mode startup which I invested in, was just outed on Alarm Clock and other sites on the basis of a LinkedIn help-wanted. So much for secrets in cyberspace. The bot’s are ever vigilant.

LocalReplay is a hyper-local site for youth sports and quietly began hyper-locally in North Carolina and vicinity with intense coverage including video and stills of games and players, StarCards, TeamCards, and many other kinds of cards as well. The cards are inspired by what we used to collect from bubblegum packs and have not only pictures but also videos associated with them. Players fill out their own StarCards; TeamCards are composites with parts filled in by coaches and other parts filled in by fans and players,

Here’s the StarCard for basketball player Jamius Gunsby of the LaGrange, GA Wolverines.

Use of the service has been spreading as one team plays (and talks to and emails) another. Professional and amateur photographers and writers, fans, and players all contribute content. The result is a rich archive full of stuff that people really care about. Evidence includes eight minute average visit time and 45% repeat visits.

LocalReplay is an example of what I believe will be the next wave of Web successes – services which strengthen and enhance existing local groups. Broadband penetration has now increased to the point where even a local group can count on most of its members having access. FaceBook (see earlier post) is a prime example of this new breed of application: it didn’t create the campuses, obviously; but it does serve them and, in its initial stage, spread virally campus to campus rather than person to person.

LocalReplay is also an example of how local news can be much richer in the days of the web. Broadcast video of local sports has been almost non-existent, sometimes appearing briefly on local cable channels or over the air. Yet watchers of local sports have been recording it ever since the super-8 movie camera made that possible. The first video-cam I ever used was one we rented to tape a basketball game daughter Kelly was playing in. Now all that recording can be made broadly available to the people who care about it. Everyone who wants to be is a video sports reporter. Proud grandpa in Grand Rapids can watch (and rewatch) the touchdown in Topeka. Last year’s game is as accessible as this one.

Success for these hyper-local sites will come a community at a time. It is possible to succeed in some places and not in others because local participation defines success or failure. Scale is needed to support software development and the platforms but 10% penetration of members of 99% of the targeted local groups is failure while 60% penetration of 20% of the groups could be a wild success (although allows room for competitors to steal a march). It’s better to get it right locally than blow out fast everywhere.

You can read more about the outing and LocalReplay on the blog of founder Galeal Zino.

Related posts:

For Web 2.0 Success - Think Local, Act Local

Web 2.0 – The Global Opportunities in Local

Local – The First Life Opportunity

The Newbies are Coming

Web 2.0 is Stuck at a Local Optimum

You Too Can YouTube

The mission of the Snelling Center for Government is to foster responsible and ethical civic leadership, encourage public service by private citizens, and promote informed citizen participation in shaping public policy in Vermont.  It was established in honor of former Governor Richard Snelling whom I had the honor of working for as Transportation Secretary a long time ago

A friend of the Snelling Center generously paid for the professional production of a video introducing the Center to prospective students, donors, and other members of the community. Initially the video was distributed on DVD.  But, like many other organizations, the Snelling Center is finding that it communicates more often with its community by email and through its website than by snail mail. I volunteered to upload the video to YouTube so I could learn how to do this.

It worked! You have to click on the arrow below to get the video to play.  If you get Fractals of Change by email, you have to click on the title bar to get to the website in order to see the video.

This is an incredible new tool for any organization, profit or nonprofit, with a website.  No charge for the storage space the video occupies.  No worry about bandwidth because the video is actually viewed from YouTube’s website even though it appears to be on yours. Little worry about reliability because YouTube is owned by Google. And easy as pie to integrate with an existing website or link to in email.

You don’t even have to be a nerd to introduce this capability to your organization.

The rest of this post is a howto. If you’re experienced with video and YouTube, class dismissed; see you next post.

First thing you have to do is sign up for a YouTube account. That’s free and easy at www.youtube.com.

If you have video in one of the formats that YouTube supports (.WMV, .AVI, .MOV, and .MPG) and it’s less than 10 minutes and 100 megabytes, you just fill in a little descriptive information, click upload, and you’re done.

But this video was professionally produced.  It was in .VOD (Video on Demand) format and, in its high quality version, it occupied almost 500 megabytes even though it’s only about six minutes long.

Googled “video format conversion” and found the shareware version of WinAVI, shareware which looked like it would do the trick.  I chose to convert to .WMV format (doesn’t matter to the people who later view from YouTube because it’ll be converted again). To make the file smaller, I specified 50% quality and only fifteen frames per second.

It almost worked.  The converted video was only 41 megabytes; the quality was fine. The problem was that the shareware version of the program puts its publishers logo in the middle of the screen. Since I already knew it was going to work, I shelled out $29.95 via PayPal for the registered version of the program.

After you upload your video, YouTube lets you decide whether to make it public or not and whether to accept comments. It also give you a widget (a small bit of HTML code) to put on your website so that the video can be displayed directly from there. That’s what I inserted in this post to make the video accessible here. You also get a link suitable for emailing and you can send email with a graphic link from the YouTube site.

Have fun.

Facebook Proves a Point

Facebook is a wonderful example of the next wave of blockbuster new Web apps.  Didn’t realize that though until I read Andy Kessler’s interview with 22 year old Facebook founder Mark Zuckerberg, who is reputed to have already turned down a billion dollar plus offer for the site from Yahoo!


Facebook’s mission statement tells the story once you look at it carefully:


Facebook is a social utility that connects you with the people around you.

Facebook is made up of many networks, each based around a company, region, high school or college.

You can use Facebook to:

  • Share information with people you know. 
  • See what's going on with your friends. 
  • Look up people around you.”

Read it again if you don’t spot a significant difference from what most other social networking sites claim to do.  Aha, you got it: Facebook is not for FORMING new groups in cyberspace; it’s for serving EXISTING groups.  This opportunity opened up when broadband penetration became great enough so that, for some existing groups – American college campuses, for example – everyone in the group is online and is computer facile.


Mark started Facebook in his second year of Harvard because Harvard didn’t have a paper “pigbook” – a duplicated sheaf of pictures and bios of students.  Facebook is a tool for creating entries about yourself and RESTRICTING the information in those entries to the group or groups you choose to identify with.  Facebook didn’t create the Harvard undergraduate community, obviously; it just enabled the members of the group to interact better than they could before. Within two weeks, according to Andy’s interview, two thirds of the school had signed up.  No marketing.


Other campuses were quick followers.  This wasn’t just viral; it was a pandemic.  Today Andy says there are 16 million users, half of whom use it every day. The key to this success, says I, is that the groups already existed.  This is not the kind of “group forming network” which were so successful on the early Internet and Web; this is a group enhancing network.  Facebook didn’t have to wait to accrete members one at a time until it reached critical mass; once it reached critical mass virally at Harvard it could infect other campuses (groups) almost en masse – and it did.


This is an example (which I should have known about) of what I meant when posting that the next great opportunity was not Web 2.0+ or Web 3.0 but Local Web.  The simplest groups to serve are the ones that are geographically connected so that you get real world as well as cyber buzz – campuses are a great example.  But you have to watch your timing because, unless the group has almost universal broadband access and use, it won’t adopt a broadband application as part of its daily life.  Needless to say, these opportunities will be opening up as broadband penetration increases.


Note also an essential “local” feature of Facebook: you can restrict who has access to your information.  Andy quotes Mark: “The power here is that people have information they don’t want to share with everyone. If you give people very tight control over what information they are sharing or who (sic) they are sharing with, they will actually share more. One example is that one third of our users share their cell phone number on the site.”


Related posts:


For Web 2.0 Success - Think Local, Act Local

Web 2.0 – The Global Opportunities in Local

Local – The First Life Opportunity

The Newbies are Coming

Web 2.0 is Stuck at a Local Optimum

el-gooG – Google Gets Local Backwards

A year after Google acquired their company dMarc as the basis for Google Audio Ads (ads on radio stations) , brothers and company founders Chad and Ryan Steelberg have left the company.  It’s easy to read too much into their departure since many purchase contracts include some mechanism to keep the founders around for awhile and founders notoriously don’t like working for acquirers.  However, there’s speculation that Google is not doing as well as planned in this venture and CNet talked to a lot of people about industry perceptions of Google’s service.

Bottom line: Google hasn’t had much impact in this industry and most commentators are wrong about why.  This is an object lesson in the hubris of web companies and the danger of assuming that what scales up will also scale down.  Also a good lesson in what the Local Web should NOT be.

At the very end of the CNET article is this quote from analyst Greg Stirling:

Eventually what's going to happen is that paid search growth will slow. The markets are looking to Google to maintain their astronomical growth rates and so they have to develop these other market opportunities to maintain their revenue growth.”

I don’t know whether Google was following this typical piece of Wall Street backwards logic when it decided to go into radio advertising.  Google has succeeded by being excellent at what it does; obviously at some point its revenue growth rate will slow.  It’s earnings will slow even more dramatically if it moves into areas where it offers no excellence or differentiation.

Google is using its national advertising sales force to peddle local ad time to national firms.  However, the firms only get to decide on region, format, and demographics - not on the actual stations.  According to the CNET story, local stations have only made remnant time available to Google because they sell their prime time to local advertisers with whom they have long-standing relationships and who pay more than Google does.  But the national advertisers don’t want remnant time.  Standoff!

Moreover, the stations would rather not sell remnant time at all than sell it too cheaply.  We bloggers’ll let Google run an add in our sidebars for almost nothing because we don’t have a better use for the sidebar space and our readers can easily ignore the ads. CNET quotes Tom Bender of Greater Media Detroit: “Somebody could come along and buy time for $15. Well, you know what? I'd rather play a record because I know that my listeners would like it more.”

Ad agency reps who were interviewed think that the problem is that Google doesn’t have relationships with the radio stations.  My guess is that’s hogwash; if Google could offer the stations more money and long-term commitments, they’d be able to buy the prime time ad spots.  But Google is (and actually should be) committed to its self-service model which doesn’t result (or isn’t resulting) in firms paying up for the radio ad spots.

According to Bender, 80% of advertising sold on radio is local.  The whole business side of a local radio station (or local newspaper for that matter) is selling ads locally which requires a great deal of time spent on relationships with local merchants AND participation by the radio station in making the creative, organizing contests, holding events, etc., etc.

Obviously Google isn’t going to compete with the local sales force of the local station.  What puzzles me is why Google didn’t approach this opportunity the other way around: have the local sales force sell for Google! Google has plenty of ad inventory online.  Radio stations have only a rudimentary presence online.  Google has no local presence; radio stations have nothing but local presence.

My suggestion for Google (which has done pretty well in most things without my suggestions) is to turn the thrust of this business around to play to their own strengths and the strengths of the radio stations.  Give the radio stations a platform on which to build their online presence.  Help the radio stations to serve their advertising customers better by selling ad campaigns which include both radio and online – particularly online pay-per-click triggered by search with local keywords or national keywords mapped to local outlets.  Let the radio stations share in Google revenue for Google inventory rather than trying to take a share of the station’s existing revenue.  Let the radio stations be the local SEO experts (with Google’s help).

It may well be true that distributing national ads to local stations will become a commodity business and the fat share that ad agencies get now will be whittled down.  Could well become an auction business with only a platform provider as a middleman.  But this isn’t the main opportunity in local advertising.

Delivering web benefits to local markets means building from local strengths and giving local organizations an opportunity to use the web to serve their own needs.  Local ad salesman won’t be disintermediated nearly as easily as their national competitors.  But helping local radio stations strengthen their service to their local customers is a national business worth of Google.

Web 2.0 is Stuck at a Local Optimum

Sketch of a fitness landscape. The arrows indicate the preferred flow of a population on the landscape, and the points A, B, and C are local optima. The red ball indicates a population that moves from a very low fitness value to the top of a peak. Illustration by C.O. Wilke, 2001.

Sketch of a fitness landscape. The arrows indicate the preferred flow of a population on the landscape, and the points A, B, and C are local optima. The red ball indicates a population that moves from a very low fitness value to the top of a peak. Illustration by C.O. Wilke, 2001.

Tim O’Reilly blogs: “What really needs to be done is not just to connect the various social networks that do exist in internet network-of-networks style, but also to social-network enable our real social network apps: our IM, our email, our phone. Where, I keep asking vendors, is the Web 2.0 address book?... When one of the big communications vendors (email, IM OR phone) gets this right, simply by instrumenting our communications so that the social network becomes visible (and under the control of the user), it seems to me that they could blow away a lot of the existing social network froth.”

When his happens, we’ll have gotten past the local optimum which Web 2.0 is stuck on (which ironically, is that Web 2.0 is optimized for GLOBAL rather than local groups). Implicitly Tim is saying this because he is looking for the vendors of INTERNET apps – email, IM, Phone – rather than vendors of Web apps to be the source of the needed innovation.

[If you already know all about fitness landscapes and local optima as these terms are used in evolution, skip the next paragraph.]

Visualize a landscape pimpled by peaks of various sizes. Visualize a population in which random mutations occur and are heritable or copyable. In this case the population is a bunch of web entrepreneurs so we’re not getting into any creationism debates (today). Height represents the number of unique daily visitors to a web site. Mutations which lead up are rewarded by more capital; mutations which lead down are punished by loss of access to capital just when it’s needed.  Standing on a peak can get you acquired.  The problem comes once a population is on a peak. It is very difficult to get to a higher peak across a fitness landscape because you have to go down to go up. And mutations which take you down are punished.

For very good reasons Web 2.0 services optimized themselves for the global communities which the Internet enabled; this was a good peak to climb and totally unoccupied because, before the Internet, it was impossible to knit global communities together without regard to distance.  Web 2.0 services also optimized for low initial costs of entry and viral marketing; as I’ve posted before, that’s a great strategy for the first social networking service and maybe even the tenth; it doesn’t work for the hundredth because everybody else is doing it.

The great environmental change affecting web businesses today (evolution is a mechanism for coping with change) is that we’ve passed a tipping point for use of the web by local organizations – organizations which already exist. Since it is now more likely than not that the majority of members of most local groups in the US have some sort of broadband access, these groups are ready to go beyond IM and email and even cheap phone calls in their use of the Web.

Web 2.0 entrepreneurs know this. In an excellent taxonomy of social networks, Liz Gannes blogs on GigaOM: “Everyone and their mother wants to build white-label social network to serve an existing interest or community these days, but most of the stuff I’ve tried using is pretty crappy.”

Why is what they build so crappy? Because they’re trying to use the stuff they so successfully developed to serve global groups to meet the needs of local groups. Trouble is local groups have different needs.

Local groups (unlike the global groups formed by the social networks) already exist. This is not about forming groups; it’s about serving them. Some may not even want new members.  Few of them will see the Web as their primary means for getting new members.

Access control may be much more important to local groups than global groups.

Most local groups are not populated by us nerds. They want easy more than cool.

Local groups may not care much about free. Those that have web sites are paying too much for design and hosting and getting too little usability in return.  They could pay something substantial (compared to what Web 2.0 services charge) and still come out way ahead.

From a marketing POV, the decision to use a web provider to meet the needs of the existing group in NOT an individual decision like using del.icio.us or digg; it’s a decision made by whomever or whatever committee is already in charge of communication for the group.

Please feel free to use comments to add to the list of differences.

The great Web application(s) for existing groups will come. My guess is that few if any these applications of them will come from those who have been successful with Web 2.0; they’re trapped on local optima by their prior success when the market was a different place.

The Local Web won’t be Web 2.0+ or Web 3.0; it won’t be the semantic web; it’ll be its own unique self, a branch from lower on the evolutionary tree. And it’ll be huge.

Related posts: (note that it took me awhile to realize that the Local Web is NOT Web x.0)

For Web 2.0 Success - Think Local, Act Local

Web 2.0 – The Global Opportunities in Local

Local – The First Life Opportunity

The Newbies are Coming

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