Looking beyond the advertising business model

It feels like we’re hitting an inflection point with Internet business models. Currently, the most dominant business model for a consumer Internet business is advertising.[1] But there seems to be a growing sentiment that this needs to change. Medium recently announced it’s rethinking how it’s going to approach generating revenue. And they aren’t the only ones who think the Internet’s ad model is broken.

What’s great about the advertising model is everything is free! At least, in theory. The promise of the Internet is that it can be scaled infinitely. So anyone or anything can access any information that is uploaded to the Internet by someone or something else. This all happens at little or no cost.

This has been great and served us very well in the early days of the Internet. Just thinking about all of the information we have access to now is astounding. You can open up any web browser and do an infinite amount of queries and, almost always, find what you’re looking for. You can read the thoughts and opinions of anyone in the world, in real-time. You can watch someone else’s first-hand experience, anywhere in the world, live. Again, you can do all of this for basically nothing.

The problem is that’s not true. Yes, you can get all of the above for little or no monetary cost to you.[2] But it’s not true that you can get all of the above for no cost. Somewhere, somehow the piper is being paid. Most commonly, for businesses that rely on the advertising business model, your attention is what is being sold. Every time you do a search on Google, your attention is being sold. Every time you log into your Facebook account, your attention is being competed for by all the different services that want to tell or sell you something.

It might not cost you any $$ but it definitely costs your attention.

And the above assumes you’re browsing the web anonymously, which if you are the typical web user, you’re not. After all, most companies are not going to throw their money at Google and Facebook just to buy random people’s attention. They throw their money at Google and Facebook because Google and Facebook know a lot about you and that’s really valuable to businesses.

You know the famous line: “By signing up, you are agreeing to our Terms and Privacy Policy”. How many of us actually know what we are agreeing to? I mean actually know? I don’t see many hands.

This isn’t to say I think companies like Google and Facebook are evil. Instead, it’s not a question of good vs evil or right vs wrong. It’s about incentives. Google and Facebook don’t want to be evil but they also don’t want to go out of business or have to fire a whole bunch of people.

They are, however, huge public companies that face a lot of public scrutiny. What about all those random websites you sign up for to share images of cats or funny gifs? They get your data too. And even if they don’t directly ask for your data, they might get it from some other company who has your data and decided to sell it because they had to survive.

Wait, what?? It’s ok, it’s in all the privacy policies that you agreed to when you signed up in a drunken stupor late on a Tuesday night in 2013 because your friend told you to check out a cute cat picture.

This quote sums up what I am trying to get across[3]:

If you’re not paying for the product, you are the product.

In addition to advertising being a sketchy way of making money, it’s also a shitty user experience. Any time you go to a free article on the web, you are almost guaranteed to see a couple banner ads, a popup asking for your email, and an auto-play video advertisement. Nobody wants any of that crap. In fact, I’d bet the website you’re visiting probably doesn’t even enjoy showing it to you. But the only way they can please their true customer (the advertiser) is by showing you more of it.

The main news page for USA Today. A good proportion of the visible page (~60%) is dedicated to ads.

There have been some improvements to the advertising user experience with things like native ads. Which are ads that look just like normal content but are paid to be shown. An example of this is sponsored Tweets or Facebook posts that show up in your feed regardless of whether you follow the company or liked their page. They may be a better user experience than the huge banner ads and popups that meet you when visiting a typical site, but they still aren’t desired.

In response to privacy concerns and crappy user experiences, consumers have been fighting back with things such as ad-blockers. Ad-blockers are not just a niche thing either. Millions of users have them installed on their browsers on both desktop and mobile.



2 out of the top 3 most popular browser extensions for Firefox are ad-blockers. Each with millions of users.

This is obviously not great news for websites that rely on advertising dollars as their main revenue source. It has even created a heated debate about the ethics of ad-blockers. Is it ok to consume content for free if you are avoiding paying the content creators in some way? Is it ok to pass on the costs to other users? In fact, there’s even a bit of a cat and mouse game going on now between the developers of ad-blockers and the developers of websites that rely on advertising.

Regardless of your stance on the ethics of using ad-blockers, there’s no denying the advertising business model on the Internet is reaching a crossroad. On the one hand, having access to basically free content is awesome and has pretty much defined the web since the beginning. But on the other, advertising has gotten really fing annoying and taken to the extreme by companies desperate for revenue.

The problem is, there really haven’t been any great alternatives for consumer Internet business models. It’s easy to get sucked into this game too as a business. Create something. Put it on the web. Give it away for free. And attract as many users as possible. Figure out how to make money later (hint: ads).

That sounds really attractive. And it is really attractive. Especially to startup founders and investors. Some have made a lot of money with this model. And some will continue to do so.

How sustainable is this? And is this what we really want to do?

As a tech founder myself, it’d be awesome to create something that millions of people would want to use. But I also want to give my users the best experience possible and I just don’t think the advertising model can provide it. I also don’t think we want to build more apps and websites that rely on advertising. Most of the people I know in tech hate ads. We hate ads as consumers, yet we spend our day jobs creating products that rely on them.

It’s also, to a certain degree, encouraged by us consumers. We balk at paying $0.99 for an app that can measure our heart rate, send it to our doctor, and predict when we’re going to die.[4] Yet we have no hesitation to pay $4.50 for a grande cup of crappy coffee.

So what are the alternatives? How can you build an Internet business that costs users very little to access yet doesn’t bombard a user with advertisements?

Unfortunately, I don’t have a perfect solution to this problem. Come on, you weren’t expecting me to just give you a one-size fits all solution, were you? Instead, I think an area that particularly interests me as having not one but many potential solutions to this problem is cryptocurrencies.

For those who aren’t familiar with cryptocurrencies or the Blockchain, I am not going to go into great detail on what they are or how they work but I really don’t think you need to know those details to understand how they could be used as an alternative business model to advertising.[5]

There are two main ways I think cryptocurrencies can replace the advertising business model on the Internet. The first is the simplest to envision, micro-payments.

You may or may not have heard of the term micro-payments before but basically all I mean by it is making very small payments. For example, fractions of a penny at a time.

With the current monetary system, there isn’t a great way to give someone (or something) a fraction of a penny. I can’t just take a penny out of my pocket, cut it into fourths and give a fourth of a penny to someone. They may question my sanity if I did (they still may).

But you can’t really do this digitally either. In theory you can pay someone $0.0025 since it’s just a calculation but the problem with this is the amount of hands that $0.0025 has to pass between. When you factor in the various banks, credit card companies, and merchant accounts that are involved in the typical transaction, the fees to process an exchange of a small amount of money between parties would far surpass the actual amount exchanged. Making it pointless to transfer this small amount of money between parties.

If there are no banks involved by using a cryptocurrency to exchange funds between parties, the fees can be extremely small and actually make exchanging something like $0.0025 worth it.[6]

This would make it possible to have business models where the consumer pays very little (fractions of a penny) for each piece of content they consume (like an article, song, etc.), yet a business could make a lot of money when that fraction of a cent is multiplied by the large audiences of the Internet (i.e. the world’s population).

This is essentially what the advertising business model already does. But instead of the consumer paying the business directly for the content, the advertiser is essentially paying fractions of a penny to the business to get their ad in front of your eyeballs. Add that up over millions of pageviews and you can see how a business can make a lot of money selling ads. Yes, micro-payments requires a large audience to make good money, but so does the ad model.

There already is a micro-payments model being used today, in-app payments. Most don’t think of in-app payments (think buying levels or upgrades in a game) as a form of micro-payments but it essentially is the same idea. You pay a small amount of money ($0.99 typically) to consume a digital product. The reason in-app payments can exist, despite all the things mentioned above for a transaction so small, is because there is one company (Apple or Google) that processes the transaction. This can be done economically by lumping all users’ transactions together and only paying the fee on that one large transaction.

For digital goods like articles, videos, songs, level upgrades, etc. the micro-payments model makes a lot of sense. The only issue with it is consumer behavior and expectations. We’ve all been trained to believe everything on the Internet is free. So how do you convince someone who has never read any of your posts before to cough up $0.0025 to read your rant on Internet business models? Despite it being a really low amount, I can see why you might hesitate to part with your hard earned 1/4 cent.

The other alternative model that uses cryptocurrencies is investment. Not investment in the speculative investment sense that surrounds a cryptocurrency like Bitcoin (though that is part of it), but investment in the protocol by participation and consumption.

Cryptocurrencies, like other assets, have value. This value all depends on how the market perceives that value. If I created a digital currency today but didn’t tell anyone about it and you couldn’t do anything with it, then it would have no value.

But for digital currencies like Bitcoin, where you can use it to buy goods and transfer funds, it has value. That value is calculated like any other asset on the market, by supply and demand.

Applying this idea to Internet business models can get pretty interesting and complex. But to keep it simple, let’s use Twitter as an example. Imagine if instead of using the ad model like it does now, Twitter instead created its own digital currency, let’s call it Twit. By participating in the Twitter network, you can earn Twits. The more likes or retweets you get on one of your posts, the more Twits you can earn.

Then you can use those Twits to get access to extra features like embedding Tweets, creating moments, or accessing the API. Since it’s a digital currency, in theory you could also use it to buy goods (as long as the seller accepted Twits). Or trade it with someone else to buy more of your preferred currency.

The creators of Twitter (and Twit) could have decided in the beginning to allocate themselves 1,000,000 Twits each. Over time, as Twits rise in value, the value of the founders of Twitter rises, just like any other business.

There are already a few businesses that are starting to test this model out. The most popular amongst these and the closest to the model I walked through above is Steem. Steem is kind of like Reddit 2.0 but is backed by its own digital currency. By participating in the Steem network, you can earn real money. It’s a really interesting idea and one I hope is experimented with more.

There is much more you can do with a digital currency and I am over simplifying a lot but the point is you can create an alternative business model to the advertising model that still keeps the core spirit of the Internet alive but doesn’t have to spam Internet users to survive. I think as the Internet continues to mature and innovate, we’ll see more and more new business models like the ones I’ve outlined above.


In the spirit of this post, I want to try something. If you found this interesting (hey, you made it this far at least) or you just want me to tell everyone I know how awesome you are, send me a small amount of Bitcoin. It can be as little or as much as you want. Thanks!


[1] I am just going to focus on consumer Internet businesses in this post. B2B Internet companies do have a number of different models that seem to work fairly well (i.e. SAAS, Freemium, etc.) and they have the advantage of users who have budgets specifically for spending money on these things.

[2] I am no expert, but I am assuming the monetary costs would be some portion of the combination of the cost for the device you use to access the Internet and the cost you pay to a service provider to hook you up to the Internet.

[3] I don’t remember who said this originally :/

[4] I’m kidding, an app like this doesn’t exist. But if it did, you’d probably debate whether or not it was worth $0.99.

[5] If you want to learn more about cryptocurrencies and the Blockchain, I recommend Googling it. It is constantly changing so it is hard to give any one resource but searching for it will definitely turn up some good results.

[6] A lot of people seem to get tripped up by the feasibility of cryptocurrencies because they say: “no one will ever understand what the value of this coin is” or “the coin is to volatile to be used practically”. But I think they overlook the fact that a cryptocurrency could be used strictly for the transferring of funds between parties. You don’t have to show this to the end user and can instead show their home currency. And you don’t have to hold the cryptocurrency for longer than the time it takes to process the transaction.

Now, I know I am glossing over some things here, but the point is cryptocurrencies for micropayments can be used strictly as a means to transfer funds and nothing more.

The Blockchain and The Fed

On Thursday I went to an event at the Boston Federal Reserve Bank called “The Hype and Promise of Blockchain”, which was part of Boston’s 2016 Hub Week. As someone who has expressed interest in the Blockchain in the past, I thought it’d be interesting to hear the Fed’s (albeit just the Boston branch) take on the Blockchain.


Don Anderson, the CIO of the Boston Federal Reserve Bank, spoke for the Fed at the event. His talk mostly outlined what the Boston Federal Reserve’s responsibilities were as part of the Fed and how the Blockchain might help them do their job. Below is some of the parts of his talk I found most interesting as well as my reaction to some of it.

The Boston Federal Reserve Bank’s Responsibilities

One of the most interesting tidbits from the talk was the role that the Boston branch of the Federal Reserve plays. It’s responsible for maintaining the distributed ledger for all of the Federal Reserve banks. If you are at all familiar with what the Blockchain is, you’ll know this is a perfect match, as the Blockchain is essentially a distributed ledger over the internet.(1)

The Fed recognizes the match, which is a good first step, but seems to be very cautious with it’s approach to how it goes about utilizing the Blockchain. This is completely understanding as you wouldn’t want the Fed experimenting with the record of your personal assets.

Where the Fed sees the value in something like the Blockchain is the distributed nature of it. If there was ever a horrible event that took place physically in the US, no matter what happened here to buildings, printed money, etc. there would still be a backup record kept distributed throughout the world.

However, while the distributed nature of the Blockchain is what appeals to the Fed, it’s also the biggest reason for the Fed’s trepidation around using it. From the Fed’s perspective, not knowing or having control over everyone involved is a big risk and one they haven’t figured out how to deal with or are not willing to take.

This is a larger underlying concern that I took away from the event. What a lot of the Fed’s hesitation with the Blockchain boils down to is the government’s lack of trust in anything but itself. Despite the promise of the Blockchain not requiring trust because of how it is built, the Fed still approaches it in a manner where they need to have control over it because they don’t trust the parties involved (or as is often the case, don’t know what parties are involved) and they don’t trust the system because they didn’t create it.(2)

Other Opportunities for the Fed

Besides the natural use case of using the Blockchain as a ledger, the Fed also recognizes it’s potential in other areas. Some of the other areas the Fed is looking at using the Blockchain in are:

  • Capital Markets
  • Smart contracts
  • Digital currency

I am not going to dive too deeply into any of these topics here but there are some interesting points of note. The first is that the Fed even recognizes the potential use cases of a technology that is very new, especially when talking about smart contracts. I was actually quite surprised to hear smart contracts (and Ethereum) even mentioned in the talk. As one could expect, there is much hesitation to do anything concrete with smart contracts since it’s so new (we are talking about the Federal government here). Though it is interesting that it has come across their radar.

Another interesting topic touched on was the usage of digital currency. Mr. Anderson mentioned that a number of countries had active projects going on today trying to create their own digital currency to potentially replace their physical one (or at least compliment it). This is a pretty powerful recognition by governments around the world that these technologies might actually benefit their citizens.(3) However, for America this comes with a caveat. It seems like other countries will be leading the way here as it was noted other countries have active projects currently underway while the US does not.

Digital currency is an obvious use case, given Bitcoin’s popularity, but again we’re talking about national governments. It is impressive to hear at least a few of them have active projects going on today.(4)

The Fed’s Concerns

All of the above is great and somewhat impressive to hear but the government is still the government and it approaches any potential risk taking with a lot of hesitation. Below is a few concerns/questions remaining about the Blockchain that the Fed outlined:

  • Transparency
  • Regulation
  • Speed
  • Transition (migration/co-existence)

Again, not going to deep dive on all of these but overall not surprising these are the questions the Fed has about the Blockchain. For anyone familiar with Bitcoin/Blockchain, speed is a question for everyone especially considering the rift it has caused in the community.

The concern that bothered me the most was regulation. I understand we are talking about the government and the government and regulation go hand in hand but it was the approach to this concern that bothered me.

Why assume regulation is needed? Why not approach it as a small experiment and see where it goes? Then decide on whether or not safe guards are needed. Rather than assuming regulation is needed and looking for a place to add it?

Conclusion

Overall, my take away from this event was it was interesting to hear the government is even considering using a new technology like the Blockchain to help it function. On the other hand, nothing said at the event was all that surprising. The Fed is using a lot of caution about how it approaches the Blockchain and other technologies like it. And most of the use cases are pretty standard and unsurprising.

What I would’ve liked to hear but didn’t at the event was the Fed considering new use cases, approaching the Blockchain as a way to do some new things, fix broken systems, etc. Alas, I assume the new uses, like in most cases, will come from the outside rather than from within.


(1) I am keeping it simple with this explanation as I am not going to dive deep into what the Blockchain is here. You can google it if curious or read more about it here or here.

(2) Hopefully this will change over time. Maybe it’s just that this technology is so new that the government truly doesn’t understand it well enough to trust it and with time it will. My surmise is that isn’t the case but going to give it the benefit of the doubt.

(3) Alright, if we are being honest with each other, my guess is governments really are interested in digital currency not because it necessarily benefits it’s citizens (which I believe it will) but because digital currency might make it easier to track the spending of certain groups/individuals. This does help them with their national security job but poses other kinds of risks as well. As they say, any technology can be used for both good and evil.

(4) One theme that I did take away from this event was governments’ recognition that these technologies are coming (and quickly) and at least trying to understand them, if not be on the forefront.