Web 4.0, Pay Day

The halcyon days of free online information are waning. A great reckoning is coming. In the future, if the information is any good, you and I will have to pay for it.

Web 1.0 emerged with the advent of Netscape Navigator, an easy way for the masses to look at information on the Internet. Upstart Yahoo!, using technology developed by Canada’s Open Text, provided a way for people to find the kind of information they wanted. And, boy, did they ever want information!

Humans want to communicate. The Internet provided a “free” avenue to communicate with the world. Web 1.0 was characterized by the euphoria of a world able to express itself like never before.

Surely there was a way to make money from the Internet miracle. Oddly, all the software and information was at that time being given away for free. “Information wants to be free” they said.

But the truth is, information very much does not want to be free. It wants to be paid for. There is no arguing people want free information. They certainly do. In the midst of this revenue starved tension , the “eyeball” business model was born.

Like radio and television before it, the attention of the Web masses would be monetized through advertising. The consensus was unassailable. However, unlike the heavily regulated worlds of radio and television, the Internet suffers from extremely low barriers to entry. Competitors by the thousands and millions could cheaply be eating away at your cherished eyeballs in a heartbeat.

Web 1.0 was doomed before it started. The cost of producing good quality web “content” is not low – its high, sometimes very high. With no way to collect a sufficient toll for the expensive content, and fickle viewers spread thin over infinite website choices, eyeballs proved stingy. Faced with no or low revenues, information creators turned to Venture Capitalist for dollars. Billions and billions and billions of dollars.

VC firms were happy to oblige, as investors believed in the eyeball model and rewarded VCs with glorious IPO windfalls. Somehow, magically, website visitors could be monetised, investors were told. If advertising revenues were not the goal, it was believed visitors could be sold products through other avenues. Every deal was like “the next Netscape.” The deals could neither be too many nor too big. But the end was near. The Stock Market crash of March 2000 brought an abrupt end to the venture cash cow and the websites died by the thousand quickly or slowly, as the money could not last. Monetization proved elusive. Very elusive.

There are notable exceptions in the downfall of the advertising-only business model, like Google, whose size makes them the king of the winner-take-all market for clicks. Even mighty brands like the New York Times can’t make their websites pay. Microsoft’s Steve Ballmer was reported to say recently that there will be no recovery in online advertising dollars, ever. Web 1.0 RIP.

Enter Web 2.0, our current phase. With payrolls gone, the legions of web developers, free-lance journalists, graphic artists and creative geniuses behind the explosion of web content went home, seven figure stock option bonanzas a distant and fading dream. But the Web Dream would rise again, blog style.

The humble “weblog” seemed initially to be an innocuous novelty that made it easy for joe average to post daily musings to the Internet, as I am doing right now. I, the user of the Web, am generating my own content, for “free.” Multiply me by several tens of millions and you have the rebirth of Internet content. User generated content, coupled with the eyeball model, has given the Internet a new lease on life. And it actually seems to be making money.

Or is it? Web 2.0, which started with text-based blogs like mine, became the darlings of silicon valley. However, the armies of people typing away were soon dwarfed by the onslaught of user generated photo and video content. The colossal price paid for YouTube by Google represents a pinnacle of Web 2.0, a place to monetize eyeballs from content for which they paid zilch. A guaranteed cash cow, right? Maybe.

As if YouTube wasn’t big enough, social networking phenoms MySpace and Facebook appear to be the new zillion pound gorillas on the block, their rumoured valuations stratospheric. And now we have Twitter, changing the world and gobbling up users by the billion. Given that the content on these sites is free to both the website owners and the users, surely the eyeballs can be turned to gold.

Gold indeed. Fools gold. Although private, Facebook continues to report weak revenues. Myspace has been laying off thousands. Recession squeezed advertisers are cutting budgets ruthlessly. What now?

In spite of the advent of user generated content, and much of it amazingly good, web enterprises like FB and MS seem persistently expensive to run. Ever mindful of the fickle web surfer, social networking sites need to constantly bring cool new features to their users. To maintain loyalty, Facebook needs to keep getting better and better, at huge cost.

Web 3.0 will soon be upon us. It will consist of ever tweaked and “revolutionized” social networking technologies that will make every possible attempt to make Web 2.0 pay. But it won’t.

Web 3.0 will be about bringing more Web 2.0 to your phone, Blackberry, and iPhone. It will shoehorn social networking into your TV. Into movies. Into eateries and bars. Into your fridge and stove. It will seek to have your eyeballs locked on more times and for longer times. If you think social networking is ubiquitous now, you ain’t seen nothin’ yet.

A few years from now, with Web 2.0 and 3.0 strategies failing to make money, with the grand old names of the media business at death’s door, the rebel yell of the Internet revolutions, “information wants to be free,” will finally breath its last. The once lofty proposition that the online world is not subject to economic laws will be relegated to the dustbin of bad ideas.

A year of gloom will ensue. Then a new dawn will come, brighter than before.

Picture a news stand. Picture the vendor smiling as every shred of paper is whisked off his shelves unpaid for by myriad passersby. Picture the vendor on the phone ordering up new stock as invoices pile skyward. Picture investors happily paying the invoices in hopes the passersby can be monetized. It’s an absurd picture.

Web 4.0 will be about online information consumers paying for the information they want to consume and ignoring everything else. All forms of content, from music to news to eBooks to magazines to video will be purchased on a pay-per-view, “all you can eat” subscription, or hybrid basis. The price for the content will be driven by demand.

Web 4.0 will dramatically improve the Internet by curing a host of chronic problems plaguing the Net Age, such as:

1. Information overload. Zero costs lead to over consumption. We gorge on content, and not all of it is good for us. We are bombarded with nifty websites and free newsletters. Content filters like RSS push too much stuff at us. Workplace productivity cannot be helped by more Facebook and more news. We are saturated.

The payment requirements that are coming will force us to reduce information consumption to manageable levels.

2. Quality will improve. The coming world of online payments will force consumers to be more selective and demanding, which will force suppliers to provide a better product. This trend will help suppliers whose quality is already high but are losing money, such as the NYT Online. Free suppliers will be competing not for dollars, but for that warm, fussy feeling you get for having done a good job. That feeling will fade, and advertising dollars will not bail them out.

3. Reliability and accuracy will improve. Over the centuries, scholars have developed systems to ensure that published material is authoritative. Amazingly, Wikipedia has managed to bypass the rigors of peer review while maintaining authority. Or has it? The famously self regulated online encyclopedia is receiving fresh criticism that its articles are often biased, self serving, and at times wildly inaccurate.

Eventually, Wikipedia will need money, and as we have observed, the eyeball business model is flawed. To ensure academic rigor and factual accuracy, Wikipedia will need a sizable staff of professionals. The best way to fund this is to charge the users. If the users refuse to pay, it can be concluded that Wikipedia’s popularity is driven mainly by it’s low price, not by it’s quality. People are getting what they don’t pay for.

4. Innovation will thrive. While hailed as the greatest breakthrough since railroad, the World Wide Web has been strikingly old fashioned in the way it does business. The Internet is profoundly different from print, radio and television, but for some reason there has been an insistence on shoehorning it into the old school “soap selling” format.

As discussed, the free information craze has become entrenched. There will soon come a tipping point (within 5 years) where the paid model will start to gain traction. This shift will open a floodgate of innovative business models where the consumer’s dollar is efficiently directed to the content providers they value.

5. The real new media revolution will begin. There is only so much new media that can be inspired by and paid for with venture and IPO money. Eventually, new media platforms will need to be real businesses that generate revenues above costs. Once this starts to happen, a new wave of venture capital and IPO fortunes will be made, driving a new technology boom.

There are many facets to the story of Web 4.0. Stay tuned for Part II of this series: The Real Goods on Digital Goods.

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10 Responses to Web 4.0, Pay Day

  1. dbrett says:

    Major “free” download site moving to paid model. This news out today from Digital Music News:

    Kazaa Going Legit, Hobbled Subscription Plan Emerges…

    After its post-Napster glow, Kazaa eventually slumped into a sullied state. Most steer clear of the app because of malware, viruses, or legal issues. Indeed, the RIAA frequently chased clueless Kazaa users.

    That is heavy baggage, though Kazaa wants a new image. Over the weekend, Kazaa – owned by Brilliant Digital – reinvented itself as a paid platform, specifically a subscription-based play. That means unlimited downloads for a monthly fee, complete with the blessing of the major labels.

    But wait, this thing looks like a dog. The subscription fee is $19.98 per month, and files are DRM-wrapped. That means PC-only playback, and no iPod, iPhone, or mobile device portability, a serious disadvantage against MP3 competitors. And, according to Brilliant, the songs disappear once the subscription lapses.

    The new Kazaa also includes ringtones, though only for one phone. The concept is being spearheaded by Altnet, a unit of Brilliant.

    Permalink: http://digitalmusicnews.com/stories/072009kazaa

  2. Rob Britton says:

    I think you’ve made a lot of assumptions.

    First assumption: that nobody will be able to monetize Facebook/Twitter/etc. I have personally worked for a company who has an excellent monetization strategy through Twitter (I can’t talk about it because I am still under NDA) and there are many multi-billion dollar companies interested. The monetization is not through advertising or “eyeballs”, it is through communication. The real innovation will not come from people building fancy new pay-per-use sites, but through ways to monetize “free”.

    Second Assumption: That this “Web 4.0” with paid models hasn’t been done already. What do you think the “Web 1.0” model was?

    Third Assumption: That technology hasn’t changed since the “Web 1.0”. You’ve taken the stereotypically uninformed manager approach in that “all technologies are equal”. Look at the “Web 1.0”. The amount of time and resources it takes these days to create a good website are miniscule compared to the pre-dotcom bust days. There are rapid development technologies like Ruby on Rails or Django, pre-built systems like WordPress or Drupal, and open-source server software like Linux, Apache and MySQL. Nowadays you can build your entire web business with two costs: your living, and your hosting. This is why the “Web 2.0” sites like Facebook or Youtube were not built by companies, they were built for free by university students. Innovation is not happening by people in the pay-per-use sector, it is happening among the youth who want nothing for their work.

    You’re right about sites like Kazaa and Napster going from free to pay models. This is not surprising since they have to pay for people suing them, so need more money. However it seems like the innovation in this area is not happening from the people getting money, it’s happening from the people who want things for free – look at BitTorrent or Limewire, these are much more sophisticated technologies than Napster or Kazaa ever were.

    And as for DRM:
    http://torrentfreak.com/drm-is-dead-riaa-says-090719/
    http://arstechnica.com/gaming/news/2008/10/eas-drm-ceo-arrogance-may-cause-gamers-to-skip-good-titles.ars
    Maybe DRM was a good idea from a management perspective, but it has turned out to have been a failed model and is now on the decline after it was found out that DRM actually encourages piracy rather than prevents it. The innovation here comes from the hackers attempting to break the encryption, not the people building it.

    • dbrett says:

      Thanks Rob for your informative comments, which, unfortunately, on the whole, are wrong.

      I have made a lot of assumptions, and all the assumptions I have made are correct. A few rebuttals for your consideration:

      1. We do not know yet if anyone will be able to PROFITABLY monetize FB or Twit. Quite right. My blog post is in essence a forecast of what will happen. For reasons stated, I predict that neither FB or Twit will be able to profitably monetize.

      2. Your view that I have an “uninformed manager approach” is indeed stereotyipcal and wrong. I am quite aware of the technological changes at play, and put to you that these changes will make it even more difficult for all but a handful of mega sites (Google, eg.) to make any money. The increased ease of content creation lowers barriers to entry into the content market, making it impossible for most to win sufficient market share to generate revenues over costs. This is the brutal bottom line no one likes to talk about.

      According to The Economist “advertisers will only pay a pittance for page views on many social networks.” The reason is that the attention of users is highly focused on the content of their friends. Myspace has been bleeding jobs and revenues and is in turn-around mode.

      http://www.economist.com/businessfinance/displaystory.cfm?story_id=14098313

      Regarding the innovativeness of hackers, keep in mind that they have a pecuniary motivation: free stuff. They innovate to get stuff for free that they would otherwise have to pay for.

      Like a stereotypical techie, you fail to see that innovation is not restricted to software development. The biggest breakthroughs in the future will be in business model innovation.

      An important innovation to watch: Facebook’s paid digital goods sales. It’s now contributing 10% of revenues. It will grow.

      In the future, if its any good, you will have to pay for it. I call it Web 4.0.

      • Briana says:

        RE: advertisers paying a pittance for pageviews – this is part of an ongoing debate in our industry (I work in marketing/advertising) about the value of “impressions” to brands. While some psychology research has found that even subliminal (i.e. non-recalled) brand advertising increases the likelihood for people to choose a given brand, increasingly I see digital advertising moving to a more engagement- or action-oriented model. For example, on Facebook, our ad planners typically buy on a cost-per-click basis – this gets them ‘impressions’ but they only pay for clicks. There are also cost-per-acquisition models (in which you define the outcome you want a user to take, i.e. buy a product or make a donation or enter an email address, etc.) and pay only when this action is taken. In an engagement model, success is based less on how many people see (or are exposed to) a given ad, but rather on how people respond over time. This is where both Facebook and Twitter are hoping to take the ad industry, and so far it’s looking promising.

        I don’t believe we’ll go back to a paid-content model, although I do believe there will be an increase in experimentation with it – and perhaps even some successes in niche content areas. I think the passionate amateurs will continue to produce content for free. Some of it will be very good, and some not so much. Most are unlikely to be able to quit the day job due to impression-based advertising revenues, but I do think we’ll see this content becoming an increasing part of the marketing mix for individuals as well as brands. Indirect and non-monetary rewards could include better work opportunities, increased community connections/networking, skill development, sales of related products, etc.

      • dbrett says:

        Thanks Briana for your thoughtful and informed comments!

        A point of clarification regarding “Web 4.0.” I do believe user-generated content will remain free, as the cost of production of the content is virtually zero. High cost content, on the other hand, will eventually cease to be free, as ad revenues will not be high enough to cover those costs. Any business that cannot cover its costs eventually go out of business.

        Facebook is currently footing the bill for the software we use and the server space to store all that stuff we create, all expensive to create, update and maintain. Who will pay for that side of it? Probably investors hoping to cash in on ad revenues. That trend will be short lived. Eventually I believe we will see Facebook rolling out paid user accounts. They will adopt a versioning strategy similar to the company that provides this blog site. I pay a small monthly fee for “Pro” features.

        I also agree with you that the motivation for users to generate content, although not cash based, is economically driven. “Reputational Capital” is a valuable asset, if well managed, can help increase the market value of our services and intellectual property. Social networking phenomenons such as LinkedIn are becoming key tools in reputation management.

        There is certainly some darn good user generated content out there, but the blogosphere cannot afford to send investigative journalists to the four corners of the world and have professional editors review their work. The evidence shows that advertising can no longer carry the load either.

        Someone will have to pay, and that someone is everyone.

  3. dbrett says:

    Update: Web 4.0 perhaps closer than forecast:

    Murdoch vows to charge for all online content
    By Kenneth Li and Andrew Edgecliffe-Johnson in New York
    Published: August 6 2009 03:00 | Last updated: August 6 2009 03:00

    http://www.ft.com/cms/s/0/7f6edc2c-821f-11de-9c5e-00144feabdc0.html?nclick_check=1

  4. Allan Hoving says:

    Bingo! (and I don’t mean Bing!) What will settle this debate is an easy-to-use tool that enables publishers to open up multiple revenue streams while giving users a choice of “many ways to pay” or otherwise support the sites they value or enjoy. See my demo at http://www.PayCheckr.com

  5. dbrett says:

    Since writing this article in 2009, a number of my predictions have come true:

    1. MySpace was sold off for a paltry $35 million as News Corp threw in the towel on their $580 million investment http://tinyurl.com/68a9h87

    2. NYT Online have initiated a paywall (http://www.pcmag.com/article2/0,2817,2382152,00.asp).

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