What we wanted to do was spill boiling oil onto the heads of our enemies as they attempted to bang down the gates of our village. But as everyone now knows, we had some problems, primarily technical problems, that prevented us from doing what we wanted to do the way we had hoped to do it. What we’re asking for today is another chance.
There’s little suspense in the story—the disastrous outcome is obvious from the first paragraph—but it works because of the poignancy of the apology. All of us have screwed up situations in our lives so badly that we’ve been forced to explain our actions by reminding everyone of our good intentions. It’s obvious now that what we did was a fiasco, so let me remind you that what we wanted to do was something brave and noble.
The fiasco I want to talk about is the World Wide Web, specifically, the advertising-supported, “free as in beer” constellation of social networks, services, and content that represents so much of the present day web industry. I’ve been thinking of this world, one I’ve worked in for over 20 years, as a fiasco since reading a lecture by Maciej Cegłowski, delivered at the Beyond Tellerrand web design conference. Cegłowski is an important and influential programmer and an enviably talented writer. His talk is a patient explanation of how we’ve ended up with surveillance as the default, if not sole, internet business model.
The talk is hilarious and insightful, and poignant precisely for the reasons Carlson’s story is. The internet spies at us at every twist and turn not because Zuckerberg, Brin, and Page are scheming, sinister masterminds, but due to good intentions gone awry. With apologies to Carlson:
What we wanted to do was to build a tool that made it easy for everyone, everywhere to share knowledge, opinions, ideas and photos of cute cats. As everyone knows, we had some problems, primarily business model problems, that prevented us from doing what we wanted to do the way we hoped to do it. What we’re asking for today is a conversation about how we could do this better, since we screwed up pretty badly the first time around.
I use the first personal plural advisedly. From 1994 to 1999, I worked for Tripod.com, helping to architect, design, and implement a website that marketed content and services to recent college graduates. When that business failed to catch on, we became a webpage-hosting provider and proto-social network. Over the course of five years, we tried dozens of revenue models, printing out shiny new business plans to sell each one. We’d run as a subscription service! Take a share of revenue when our users bought mutual funds after reading our investment advice! Get paid to bundle a magazine with textbook publishers! Sell T-shirts and other branded merch!
At the end of the day, the business model that got us funded was advertising. The model that got us acquired was analyzing users’ personal homepages so we could better target ads to them. Along the way, we ended up creating one of the most hated tools in the advertiser’s toolkit: the pop-up ad. It was a way to associate an ad with a user’s page without putting it directly on the page, which advertisers worried would imply an association between their brand and the page’s content. Specifically, we came up with it when a major car company freaked out that they’d bought a banner ad on a page that celebrated anal sex. I wrote the code to launch the window and run an ad in it. I’m sorry. Our intentions were good.
Cegłowski’s speech explains why Tripod’s story sounds familiar. Advertising became the default business model on the web, “the entire economic foundation of our industry,” because it was the easiest model for a web startup to implement, and the easiest to market to investors. Web startups could contract their revenue growth to an ad network and focus on building an audience. If revenues were insufficient to cover the costs of providing the content or service, it didn't matter—what mattered was audience growth, as a site with tens of millions of loyal users would surely find a way to generate revenue.
There are businesses, Cegłowski notes, that make money from advertising, like Yahoo and Gawker. But most businesses use advertising in a different way. Their revenue source is investor storytime:
Investor storytime is when someone pays you to tell them how rich they’ll get when you finally put ads on your site.
Pinterest is a site that runs on investor storytime. Most startups run on investor storytime.
Investor storytime is not exactly advertising, but it is related to advertising. Think of it as an advertising future, or perhaps the world’s most targeted ad.
Both business models involve persuasion. In one of them, you’re asking millions of listeners to hand over a little bit of money. In the other, you’re persuading one or two listeners to hand over millions of money.
The key part of investor storytime is persuading investors that your ads will be worth more than everyone else’s ads. That’s because most online ads aren’t worth very much. As a rule, the ads that are worth the most money are those that appear when you’re ready to make a purchase—the ads that appear on Google when you’re searching for a new car or for someone to repair your roof can be sold for dollars per click because advertisers know you’re already interested in the services they are offering and that you’re likely to make an expensive purchase. But most online advertising doesn’t follow your interest; it competes for your attention. It’s a barrier you have to overcome (minimizing windows, clicking it out of the way, ignoring it) to get to the article or interaction you want.
A back of the envelope analysis from Felix Stalder gives a sense of how little these ads are worth. Last quarter, Facebook reported that it had 1.32 billion users, collected $2.91 billion in revenue and made a profit of $791 million, for a profit margin of 27 percent. Facebook is clearly doing a great job making money from ads. But the profit per user is just under $0.60. That’s a fascinating figure, because Facebook reports that users spend 40 minutes per day on the site, or roughly 60 hours per quarter.
Stalder is interested in the idea that users are working for Facebook, generating content that the company profits from without getting compensated. But even if we ignore the important idea of “free cultural labor” that makes a business like Facebook (or Tripod!) possible, it’s striking that our attention, as viewers, is worth only a penny an hour to Facebook’s advertisers.
Don Marti uses the same set of Facebook earning numbers to demonstrate that print newspapers make roughly four times as much money in advertising as Facebook does in the United States. Print advertising generates these enviable, if shrinking, numbers despite capturing only about 14 minutes a day of Americans’ attention. This “print dollars, digital dimes” problem is an apparent paradox: Why are targeted digital ads worth an order of magnitude less than untargeted print ads, in terms of “attention minutes”? Marti argues that advertising in a public place, like a newspapers, builds brands in a way that private, targeted ads can’t. (I’ve argued that this is a legacy effect and that print ads will fall in price once there are efficient digital ways to reach the majority of consumers in a market.)