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Home | Internet & Businesses Online | Banner Advertising WEB OR DOT COM 1.0 What was predicted: All software was going to be Internet-based, free to end users, and supported by advertising revenue. Traditional licensing of software was old-fashioned and passe. Try getting an emerging software company with a traditional licensing model funded in the year 2000. If you weren't laughed at by potential investors, you were at least viewed as a dinosaur. What actually happened: I doubt if I need to spend too much time reviewing what happened, unless any of you were living in a cave in 2001. So here we sit in 2006, in an era that the press been dubbed "Web 2.0". Google is the hottest company on the planet, supported almost exclusively by advertising revenues. They are buying software companies left and right with inflated stock, eliminating license fees, and rolling the acquired products into their wildly successful advertising-supported model. Once again I'll pose the questions: So, is traditional software revenue via licensing dead? Will all software eventually be "given away" to the end user and supported by advertising? Doesn't Web 2.0 sound a lot like Web 1.0? My thesis is that it does, with a few obvious exceptions. Google has shown that in some cases, the advertising-supported model for software can work EXTREMELY well. And people aren't in quite the crazy mood that they were in the late 90's, when otherwise perfectly sane, experienced VCs and other business people appeared to lose their collective minds. Statements like "it's not about the revenue, it's about attracting the most eyeballs", and "we'll figure out how to monetize it later" were NORMAL. And let's not forget my all time favorite "Your not spending money fast enough". I'm not suggesting that craziness is returning; because not enough time has past to forget the resulting pain wrought on the high tech industry. But I do believe, that in terms of ultimate effect and rate of change, the pundits once again are viewing a molehill, and proclaiming a mountain. Google is hugely successful. They've hit on a great formula that works for the Search Engine software business. The formula that they've created has allowed a great many people to build websites with excellent, useful content, and monetize that content, in whole or in part, with online advertising. But I strongly disagree that this is the future of all--or even most--software applications. If you look at the Google phenomena closely, I believe it is a special case. The Search Engine business is a mass market; nearly everyone uses one these days. It is also a large market with almost an infinite number of identifiable submarkets of customers, which is what allows Google to sell so much advertising, to so many different customers. When you do a search in Google, you are essentially joining one of those submarkets, making you identifiable to the vendors in that space. There is also the wonderful fact for Google that their version of online advertising looks a lot like their "free product"--the search results, and their ads are reasonable direct replacement alongside those results. In fact, a large number of (even sophisticated) people don't even realize they are responding to advertising when they click on a "Sponsored Link" result. There are probably a number of other mass market applications that will provide a similar opportunity, for using an advertising-only revenue model. But for most software applications, I don't believe that this model will be work. Most software applications are focused on a smaller market. In many cases, the ongoing R&D to support these important--but not universally needed--applications, may be nearly as high as developing a Search Engine. There may be advertising opportunities available to online version of these applications, but the revenue in most cases may be far less than what is required to fund R&D, marketing and sales--while still make a reasonable profit. I also don't believe that clicking on advertising will be nearly as "natural" while working on a spreadsheet, writing a letter, or doing your online banking. I think that even Google is making a mistake by eliminating license fees for many of the applications they are acquiring, in their recent M&A frenzy. Everyone gives them a pass on their strategy, because of the wave they are currently riding. But that doesn't mean that it's the right one. Only time will tell for sure. I remember a similar point in the development of Netscape (one of the Google's of the past) where everyone thought Netscape could do no wrong. In the end, their strategy looked very flawed, and of course they failed to execute--which is generally even more important to success. Certainly advertising form factors and technology may adapt to these newer online applications--but that's a big if, and counts on innovation. I'm sure many software companies with advertising-only business models are being funded TODAY. Sounds a lot like "we'll figure out how to monetize it later", to me. Another interesting point to consider that in other forms of media, advertising as a revenue source is taking a beating vs. user fees. High Profile examples include television (cable & pay per view vs. traditional free networks with advertising), and the emerging Satellite radio. My expectation is that there will be a few major successes, like Google, that rely exclusively on Advertising for revenue. There will also be a larger number of companies that augment their licensing revenue with advertising. But for the foreseeable future, I see licensing revenue remaining as the backbone of software business models. The moral of this story is, don't always believe what you hear. It's very hard to predict what will really happen in High Tech. Sometimes what is shouted the loudest in the technology business, turns out to be laughably wrong, in hindsight. That's my unvarnished opinion--go ahead and shoot holes in it! I'm curious to hear other opinions and supporting facts. Article Source: http://www.articlewheel.com
Phil Morettini is President of PJM Consulting, Management Consultants to Tech Companies PJM provides assistance in Management, Product Marketing and Biz Dev. More Articles at www.pjmconsult.com/philsblog.html "> Tech Management Blog . Contact Phil at www.pjmconsult.com"> Software Management Consulting
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