Advertising falls short of earning its place online
There is a company that generates 97 per cent of its revenue from a single source. Some say it is persuasive, others call it manipulative. It permeates almost every aspect of our lives and many of us fear that it holds too much sway over the minds of our children. The company is Google and the source of the revenue is advertising. Organisations paid Google US$23.6 billion (Dh86.68bn) in revenue last year for their adverts to be placed in certain locations on its pages and within its applications, such as Gmail. Google is not alone in profiting from this business model in which advertising is the primary source of revenue.
Facebook, which now has an estimated 500 million global users, also has the same model. It netted $800 million from advertising sales last year and is valued by the venture capital firm Elevation Partners at about $23bn. That is a staggering multiple of nearly 30 times its annual sales revenue. And here is the interesting part, Facebook is expecting to go cash flow positive this year, which is not the same as making a profit.
The point to note is that both these companies rely on a single source of revenue - advertising. So potentially there is a single point of catastrophic failure in their business model. If the mood of customers were to change so that they no longer wanted to view adverts then the business model fails. If the companies paying for the adverts realise they aren't getting a big enough bang for their buck then the business model also collapses. And along with it go the starry-eyed corporate valuations. If that happens the only thing left to do would be to inscribe the names Google and Facebook on tombstones, to be placed in a corporate cemetery to rest in peace alongside recent mounds containing the remnants of Enron, WorldCom, Lehman Brothers and Washington Mutual.
The first crack in this business model is already beginning to show. Customers are being turned off by advertisers because they don't trust them. Research by Forrester showed that only 20 per cent of adults trust online classifieds ads. Academic research backs this up. We've reached this point due to the reckless abuse of salesmanship. For example, there was a time when the maker of the Chesterfield brand made the following claim in the New York State Journal of Medicine about its cigarettes: "Just as pure as the water you drink ? and practically untouched by human hands." It's little wonder that the public has become sceptical of silver-tongued public relations and advertising executives.
We don't trust adverts anymore, whether in physical form or in cyberspace. "The problem is not the medium, the problem is the message and the fact that it is not trusted, not wanted and not needed," says Eric Clemons, a professor of operations and information management at the Wharton School of the University of Pennsylvania. "The internet is the most liberating of all mass media developed to date. It is participatory, like swapping stories around a campfire or attending a renaissance fair. It is not meant solely to push content, in one direction, to a captive audience, the way movies or traditional network television did."
Over and above the lack of trust, the other problem with internet advertising is that it goes against the very grain of the internet as a communications medium. When Vint Cerf and Robert Kahn, the lead designers of the network architecture for the internet, were creating it in the 1970s, they put in place two fundamental principles. Number one was that there would be no central ownership or control so no one could decide what went on it, but each application would be judged on its merit. Secondly, the data - whether e-mail, images, phone - would be treated equally, so that one type of application would not receive priority over another.
Hence meritocracy and equality are two axioms of the internet. And pushed advertising as provided by the likes of Google and Facebook is essentially an imposition on these two principles. It is not meritocratic because the advertisers have not earnt their place in our cyber lives and devices. Rather they have paid their way in; a fact that users resent. Neither does imposed advertising have anything to do with equality.
The internet is a forum that we all own and participate in. With the ability to self-publish through Web 2.0 technologies there are now more people today voicing their opinions and views across the world than ever before. The chatter in forums and blogs on web servers connected to the internet rises and rises to a deafening level, until everything is drowned out and we can hear only the hum of all of the voices together.
In this setting, pushed internet advertising is a complete waste of resources for the companies pursuing it. The message they are trying to communicate will be drowned out by the collective noise of the users, each one of them commenting and voicing their own views. And more fundamentally, their advertising messages are not trusted, so will not be welcomed but ignored. There are ways to make money through the internet, but advertising provided by the likes of Google and Facebook is not one that I'd be banking on for too much longer.
Rehan Khan is a business consultant and writer based in Dubai
Updated: July 4, 2010 04:00 AM