Pito's Blog

[T}his tendency to expect stuff to be free has had a chilling effect on innovation in our industry.

I'll play devil's advocate and say that this sort of argument is in the same ballpark as the media industry arguing that Tivos should be banned. The argument is, "People will skip the ads, which devalues them, and so we will no longer be able to deliver our product!" The unspoken part is, "..with our existing business model!" The Tivo is great for innovation... innovation in terms of new business models for the content producers. And the same case can be made here.

Google is free only to the extent that there is no monetary cost to me for entry, or for a search. I get ads, though, and presenting those ads to me has value to someone -- the advertiser. It is a two-sided market, where my presence alone is the cost of service to me. My use of the product has inherent value. (Last week's Economist had a great article on advances in understanding of the economics of two-sided markets. Very little research had been done until quite recently.)

"Ad supported" is, for the time being, a valid business model. And a valid business model is "build something cool and get enough eyeballs before I introduce the ads." That's what I've seen with most of the blogs I read that offer RSS feeds. They started offering RSS feeds because it's cool, useful, and increases readership. Only a few months ago did they start ad insertions into the feeds.

Another valid -- again, for the time being -- business model is "build something cool and get enough eyeballs to get bought by a conglomerate (Yahoo, Google, MSFT) that wants to strengthen its brand identity". This hardly chills innovation; it's something that was perhaps not even possible 10 years ago!

Many of the products that you mention or that fall into the two business models I describe above have relatively low development and operational costs, so the risk/benefit tradeoff is justifiable. I doubt that they chill innovation in high cost-of-development concepts, because those concepts will fundamentally require a higher expected return, and thus a business model that is more conventional than "ad supported" or "get bought for brand identity".

So, yes, perhaps this is chilling to innovators who want to create new things that have relatively low cost of development but want to pursue a traditional VC-to-IPO business model. But that's because they're behind the times... that market has moved on, and the innovations are in new ideas with new business models. The VCR is here to stay... and after all that grousing about the end of the world, look how much we can make by selling pre-recorded videos!

Perhaps you should start charging a subscription fee for your blog? After all, offering free insight like this is chilling to pundits who need to make a living and feed their families by having published columns people pay to read... ;-)

--Jered

Jered, yeah you make a persuasive argument, especially the last part: "Perhaps you should start charging a subscription fee for your blog? After all, offering free insight like this is chilling to pundits who need to make a living and feed their families by having published columns people pay to read... ;-)"

Still I've seen many 'garage projects' that looked like they might provide significant value to lots and lots of people never get to that point because the developer/innovator/entrepreneuer just couldn't afford to stick with it...

But your (and Shimon's) counterpoint definitely make me think again...

Jered states the argument well. Things might not work out to give all garage entrepreneurs enough time to develop their projects, but I believe they are in better shape than ever. A single hacker or a small team can really do a lot today, if they pick the right problem and solve it in a way people like. Compare this to the model of the 70s/80s where all computing innovation had to get the research, execution, and distribution support of one of a handful of major computer manufacturers, and it seems like innovation is just stepping out of the freezer. The potential for acquisition by Google, Yahoo, or Microsoft is a huge driver for innovation; and these companies have indeed been acquiring a lot of little hobby websites that don't seem to have a revenue model, but are useful enough that they have large userbases.

Additionally, thanks to Google, online advertising is a much better way to make money than ever before. Most of the time, online ads work better for every party involved, and it's easy to plug a popular website into an ad syndication system and start cashing in. This is a new business model, and it works well for smaller-scale endeavors.

I think that's the real trend we're seeing here. People are achieving innovation with smaller investments, smaller risk levels, and with less expensive infrastructure. I don't need to raise VC and hire 30 people to ship some software; I can serve tens of thousands of users using free software and a $100/month dedicated box. This is reducing the gap between product development and the market: innovation isn't about doing lots of great things and then toiling away to teach the market about them; it's about doing little things that attract a few users, and building on them in response to those users. Listening and adapting is getting to be more valuable, and the ability of big companies to neglect and manipulate their users is going down. Perhaps most innovation isn't as big and monumental as before, but more frequent.

At least I hope so. :)

Pito,

To me the main reason Google has done so well is because of the low cost of entry to advertise on Google Adwords. There's less risk to get started, or for that matter cut back my advertising. This actually encourages more advertising. I'd suggest that if a company can develop a business model that has a low entry point for customers to make a purchase or buy advertising, so that they can try before they commit more resources, that business model will help to grow the company's customer base.

There's another issue, if advertising is not as effective, and PR and dialogue are much more effective. Is there a way to provide free services to customers in return for putting the customer directly in touch with an advertiser. We'd get rid of the advertising, something customers probably want, and put vendors directly in touch with customers, something vendors want. Perhaps provide higher levels of service to customers who are more valuable to vendors.

Imagine GNU software, Linux, Apache, Tomcat, Sendmail, PHP, MySQL, ... were proprietary software. Would there have been a chilling effect on the development of the internet? I think THAT case is 1000X more convincing than vice versa, which seems to be your point.

Interesting to see people thinking of EVERYTHING FREE! Well it just happens that I may know how to MAKE EVERYTHING FREE! riseatlantis.com to save the world!