It’s expected that by 2011, online advertising will go past the newspaper advertising (see the growing demand-supply difference in online advertising). Surprisingly, VCs too want startups to rely on online advertising (rather than charge customers for any product/service).
First, lets talk about the online advertising market for US.
- Online advertising will grow by more than 21 per cent per year to reach $62bn in 2011 (while newspaper advertising is expected to total $60bn in 2011)
- In 2007 the amount of time spent reading newspapers was overtaken by time spent online.
- Use of media in the workplace increased, however, up 3.2 per cent to 260 hours per employee per year [Source]
Looks like, VCs are also ‘over struck’ by advertising bug and they do expect startups to build their revenue model on the lines of advertising dollars; VCs are far too comfortable with ad-supported startups than startups who charge customers for the service.
Why is that so?Venture capitalists tend to be fans of ad-driven sites since advertising revenue theoretically covers the cost of giving away a Web service free, and free sites attract users much faster than sites that charge money. Such sites are typically also cheap to run because there is often no need for customer-service agents or costs for physical goods. So such companies can have high profit margins if they succeed.
Startups are being penalized for non-online-ad-model.
“If you have a model that is different from the 90% of consumer-Web companies folks are seeing today … it’s difficult to break through that clutter,”…Nonetheless, some entrepreneurs trying to profit from non-online-ad models say they are being penalized for being different. EnjoyMyMedia, which charges people a monthly subscription to post and share family videos, photos and other materials through special online software, has faced some “hard questions” from investors over its business model, says CEO Keith Loris. (source)
To a certain extent, this looks very fair – because:
- Startups don’t have a big “trusted” brand
Will you pay for a service you aren’t aware of? Most of the startups face “credibility” issue with their brand. For e.g. lets say, if RotueGuru wants to charge 100 Rs. per detailed driving direction, how comfortable will you be with paying for their service? - Transaction based businesses face huge challenge from the biggies. Case in point – Y! Mail used to charge for 25MB premium space and Google gave away all for free. Result? Instant traction. Instant users. And Google’s 1GB storage killed almost all of the mail services that used to charge for storage etc.
I look at the Indian biz models and do feel the same – VCs have funded social networks who have no other revenue model, but to rely on adsense and other advertising networks.
What do you think? Do you see any innovative business model in place? Except for secondlife, where people trade goods/real estate (and real $$s), I see a binary version of revenue model – either free-to-use-and-ad-supported, or pay-for-the-service model.
ANd this is what I call herd mentality. Just because online advertising is supposed to go northwards, VCs want startups to reply on online ads…
Even in Indian context, most of the recent fundings have been for ad-supported sites.
@Tarun:
And why not ? Without pointing to big sites like Google , Yahoo ,etc. who are obviously doing immensely well, online advertising is even profiting individual bloggers.
@ Raseel ,
Yup, online advertising is profiting individual bloggers because in most cases their Infrastructure and hosting cost is zero . content is there feedstock , Game is different if you are in Non Blog , Non UGC space . what will you do ? say you are Zoho, picsquare or itasveer . what will you do ?
world need a clean interface [out goes banner ADs] ,world need regular update [ hard to do it part time ],and top item in wish list is “Free” . Go Figure .
i seriously think . problem is not with Users intent to pay for premium . problem is with Friction in Payment mechanism. most of the internet sites take payment only by Credit cards .now how many user have access to credit card , and how many of them are comfortable using them online . a student who may upgraded to Rs 200 /Month premium account how will he do it ?
there is a gap in Chain until its fixed , monetization will be a hard task . we need Indian version of paypal . anybody listening ??
Now why do VCs bet these Ads only revenue model ? may be because they are optimistic or clueless or both .
@Prashant:
I find it hard to believe that VCs are clueless about their investment strategies. The fact they are investing a huge sum, is an implication of the fact that they have tried to measure risks, forecast markets and try to get a general trend of things. The Online Ad revenue model’s success only goes to prove that their assessments have NOT been wrong.
Clean interfaces (with text ads, thanks to Google), regular updates (Something like a Zoho, itasveer or any such Web 2.0 portal is NOT a part-time venture) and a Free Software product/service is exactly what drives the Web 2.0
I agree on your last point about Indian mentality still not ready for online CC payment (this does not hold competely true for maybe 1% of Netizens most of whom are from the Metros). And I know it best since, my website (www.opensourcedeal.com) does not even have a CC gatway and I haven’t received a complaint even once !!!
But that change in mentality will come eventually, make no mistake about that.
I have serious doubts that VCs will be getting great returns by funding such companies in India, at least not in next 5-8 years. Problem with the ad based model is that unless one has a product that provides very high value to customer (google provides best search results, how are yaari or mimglebox better then Orkut, Facebook etc.?) they will not stick to your product for long.
My $0.02
@Shailender:
Its not the ad-based model that is the problem here – it is the reach. India has only 85 lakh internet subscribers – so the target market size itself is constrained. Compare that to the Indian mobile space and the market size shoots up.
@Raseel
Free Software product/service is exactly what drives the Web 2.0
why only web2.0 its been like that throughout the history of internet in India . but bitter truth is that failure rate is also highest in internet venture more than 90% . why ?
biggest fallacy is that folks don’t want to pay . they do . there are two point
#1 Friction in payment process as i mentioned in my previous comment
#2 Incentive to pay . this point is slightly tricky . look at it like this , if you want to do something on net [say you want to sell dog food or herbal viagra ] , you face competition from
A) ways of solving the same problem off line.
B) Other startups trying to solve the same problem online .
In off line world you can be sure of some traffic and loyalty due to geographic proximity and assurance of dealing with a human to whom you can go if product doesn’t perform as promised .this is not there on net . add to it the fear and friction of using CC online . now that may explain why most guys don’t prefer to buy a Big Ticket item [SLR Camera ] on net
because the incentive [ Price Difference ] is not big enough to offset the fear and friction. plus one big plus with Brick and Mortar is Instant Gratification of having purchased stuff with you . so there is very little incentive for user to buy online .
if your service don’t have a off line parable or value proposition is too good that user will come and pay, chances are it will soon be copied and one of the copy cat guy will get funding and make it Free . he will plan to make money on Advertisement . good number of your user will switch loyalty and you will go bust . next VC will look at it and say “look Ad support is the way to go ” .
funny business .
@Prashant
The last scenario that you explained is exactly the way it should work. If I wanted a service like,say, photo-blogging and you charge me, while some other guy NOT only does it for free, he also lets me see non-obtrusive ads which are sometimes relevant to what I’m doing on that page.
I, as a consumer, would not care who got the funding. I would just want a great deal. Thus, online advertising is a good model.
This is pretty surprising to me as a lot of industry pundits have repeatedly argued as to why relying only on online ads is not a reliable and scalable model. I also agree to what they speak of specially looking at the type and amount of revenues that Facebook and MySpace (the biggest examples of websites sustained through ads rather than charging money from users) actually generates compared to what one might think of their potential money that they can make keeping in mind their HUGE user base.
Don Dodge has a good blog post on the WSJ article – http://dondodge.typepad.com/the_next_big_thing/2007/08/web-20-web-app-.html
RouteGuru’s and the link is spelled out wrongly there
While VCs may have been comfortable with the Online Advertisement revenue model, Angels perhaps feel little bewildered with it. They sometimes prefer just the opposite.
How do we bridge this expectations gap?
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