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The Post Free Era and What it Means to Google

Posted: September 16th, 2009 | Author: | Filed under: Companies, Google, Media | Tags: , , , , , , | No Comments »

For the past few months I have actively quested against using anything that is free, asking difficult questions of the product, and often choosing a paid alternative when the answers were not forthright enough, and I have been noticing similar tension on twitter, and the other social media places that I haunt, as well as casual encounters with friends and family. Why have I have been trying to move off of the free ecosystem? What reason could there possible be? I mean who doesn’t want stuff for free? Well, that answer is complicated, to fully understand it, I think we have to look at some of the things that the “free” ecosystem has brought us.

The first, and most significant negative thing that the expectation of free software and services has brought to us is a huge proliferation of spyware and malware. There are a few reasons that the amount of spyware and malware increased dramatically around the time that software became available for free. It is largely a consequence of the law of unintended consequences. First, fast internet became widely available at costs that are reasonable. In fact, for a while ISPs played around with having a free price point, but that faded away quickly as capital intensive enterprises are incompatible with the gift economy.

The next is a series of unsustainable business models driven by advertising with ever declining value delivered to the sponsoring companies due to consumers being advertised out. This in turn has driven to many choosing not to consume content at all, or destroying once vibrant businesses such as newspapers, music, and movies. What is the answer to the decline, to increase the ads of course, to make up for a clear down trend with increasing the volume and driving down margins while lowering the quality of the product to keep the same profitability. Does this sound familiar, it should, its the same thing that happened in the housing market to continue an unsustainable business model. Instead of innovating out of the crises, the advertising companies are clinging stupidly to the old systems.

Once fast internet became widely available, the GNU / GPL driven software model with distributed version control systems became possible. Now people were able to collaborate on software, in countries where labor costs were cheaper, driving the price of development down in general for large projects. The GPL began with a powerful intent, to make software, and its source code available to facilitate learning and improve the quality of all software. It has largely achieved this end, however it got end users used to being able to download high quality software for free. At first, this was all gravy, but eventually these same people started to get tired of giving away their hard work, some of them graduated college and needed to make money, others just wanted to improve their standard of living, the reasons are too numerous to go into, but the result is that these “alternative” business models started to spring up around software that at its core was free. The service / support model was the first to appear, along with making closed source software available for free but with embedded malicious software. The idea behind this was simple but powerful, by installing covert software on millions of remote PCs you could send spam email advertising whatever you wanted, and no technology ( at the time ) could stop you.

This was the beginning of the advertising ecosystem. Yes it basically came from malware.

TANSTAAFL : There ain’t no such thing as a free lunch. Truthfully, nothing is free. Businesses saw what was happening in the malware / spam / zombie / email space and wanted to find ways that they could do this in a legitimate way, since millions of dollars were being made off of the spam networks. What the malware / spam networks were getting from users, in addition to their IP addresses, were profiles of their behavior online, the networks could generate information about what sites were trending etc, where people went when they were looking for a product, where they went after the first click. Crack cocaine for marketing executives. It is always surprising to me how many people do not understand what is happening when they use google, bing, yahoo, etc, and why they are free. These are hugely expensive enterprises, with huge costs that could almost never be made up by charging people to use them. I don’t know what Google would cost if they didn’t advertise, but I would imagine that it would cost thousands a year to use it in order for Google to be profitable in the same way.

Webmasters often don’t think about why Google would give away analytics when Omniture has built such a profitable business selling web analytics for years. The reason is simple, Google makes more money from adwords when they can trend users from the Google search page, through their path from site to site. By including Google’s tracking code, an authenticated user logged into Google’s services can be followed.

This has benefits to the user in Google’s case, since Google has so far shown that they can be trusted with the vast amounts of user behavior data that they have amassed, and they do frequently show ads that are highly relevant. So Google’s business is in gathering data points about your behavior, and using that data to present you with the ads that are most appropriate to you. Every application and service that Google builds is to this end.

Yahoo and Microsoft are desperately trying to copy this business model, as are many smaller vendors, and that is the problem. While Google can be trusted, I do not believe that the others can be, and frequently I am not 100% certain about Google. The problem is that Google is behaving as though it were the only company out there doing this, and they seem to be oblivious to the fact that people don’t want to see ads, even good ads. I keep hearing that poor targeting is the culprit, but I am not so sure that is true any more. There is a class of people that is rapidly growing who just don’t care what type of ad it is they are just tired of the cognitive noise. I would be included in that class.

With so many different ad networks trying to copy Google, the result is end-users inundated with ads, everywhere they go there are these behavioral ad networks trying to determine what ads to show you, with varying success and quality. They are all clamoring for data, trying to convince site owners to put their little tracking code into their stream. Unfortunately this hasn’t stopped at the web, iPhone apps, Blackberry and other mobile apps, even desktop apps are showing little ads in order to compensate the developer, whose time is extremely valuable, for their hard work.

The problem for a company like Google that is interested in doing the right thing, or at least trying to, is that the lesser companies are producing ad-fatigue in users, which has lead to adblock pro and other advertising blocking solutions as end-users try to reduce the noise around them. These companies, realizing that their ad driven dreams are beginning to fade have moved to making ads look like content in the old 30’s radio business model. The funny thing is that those old tactics led to the FCC getting involved and setting guidelines as to how advertising should be embedded into programs. It is a vicious cycle that is reproducing itself in all mediums.

The embedding tactics range from “independent” product blogs, to product shils on twitter, to television programs designed to specifically and only show you a car gratuitously. Again, not all of these are bad, I follow several businesses on twitter that do not annoy me, and actually behave more like a partner than someone trying to cheat me out of my money with a product that I don’t want, and can’t use. Some of these ad sponsored “apps” on the iPhone for example are so thin as to be a press the monkey with a batman logo. What is the point of that? It is just noise.

So what’s the problem? Everyone is getting paid.

The overriding problem is this… its too much sponsored content in general. Everyone seems oblivious to this and I’m not sure why. It could be the same thing that lead to the housing crash, everyone was making way too much money to look at the obvious. People are tired of being advertised to. Everyone is touting some kind of free future where everything is free and companies are always making money in “other” ways. Typically these “other” ways are not specified, but I can fill in what “other” is. They are increasingly nefarious and opaque ways of capturing your behavior and data, then using that information to influence your behavior, usually resulting in you buying stuff with you not being able to remember why. This is bad, and is not really a proper way to run a business. It can only end with massive data leaks and a public so unhappy that government legislation is required.

I don’t think this will happen. I believe that the public is smarter than this and that they will start to back away from free software due to being saturated with ads, and begin to embrace paid software from companies with clear agendas and business models. I think that the VC money will begin to follow suit, heading instead to companies with models that a 5 year old could understand, as opposed to models that only a PhD in macroeconomics can comprehend. We make a product ( content ) and then we charge more for it than what we paid to make it.

Another of the problems with the ad model is that where once it liberated artists to develop art without needing to think about how they were going to get paid for it, it is now doing the opposite. Companies are hiring artists to make movies, television, plays, books, video games, you name it just to push some product. Artists are now the slaves to the master that they were once masters over. I would argue that the newspapers have it right, that they just need to start charging for content. It is critical, however that they get their pricing right. I think that PayPal and micro-payments will be the Visa of the future, if Visa gets their act together and drops their rates, perhaps they could be the one. Perhaps newspapers’ circulation will drop, but they would be more profitable and healthy. One company has demonstrated that this is a sound business model, and they are standing astride the world right now as a colossus.

Apple is poised to do very well in this system. Not only have they always chosen to provide high quality products and charge top dollar for them, we see that the public is more than willing to pay for quality software and hardware. MobileMe may have had its issues, but Apple’s motive in making it is simple, they want to sell more iPhones and Macs, they make 50% profit or more on each one, there is no ulterior motive, they are not selling my data, there are no ads, period. They make money in a way that I can explain to my daughter in one sentence. They could put some ads in the iLife suite and give it away for free, but why? They have proven that people will pay not only for the Mac to run the software, but they will pay a reasonable amount for software on top of that.

Microsoft and Adobe are as guilty for creating the free / illicit software market as anyone, by charging ridiculous amounts for their software for what it does, people had to figure out alternative means to get their work done. This feature of software engineering is furthering the dependence on these opaque difficult to understand business models. If you make a solid product and charge a reasonable sum, even a high-reasonable sum, people will pay. Otherwise, they will pirate or find ways to cannibalize the standard method of doing business.

To sum up, the free era is over, Google’s business model is in danger, and Apple and content companies that create quality product and are willing to charge for it stand poised to make a comeback. Microsoft and others following Google are lemmings headed off the cliff. I think the advertising bubble is about to be popped.