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Game theory in the popular press.

The Unbearable Lightness of Ad Revenue

Business World
Frank Yu
4 October 2000
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HONG KONG -- The Internet changes everything. Most of all, the Internet changes itself in a dynamic feedback loop of adaptation and technology upgrading. One dramatic change has been the fall of the ad revenue model for Internet companies. It's not dead, though. It's just molting.

The model is under attack from investors, media (biting the hand that feeds it) and industry analysts who only a few months ago touted its virtues. The vulnerabilities come in through three vectors: Psychology, Technology and Game Theory.

Psychology: The term "habituation" refers to a subject's ability to learn to tune out distractions and eventually ignore even the most annoying flashing banner ads. I rarely notice that banner ads exist, let alone what they say. If the ad is interesting, I do see the logo and the short copy, but I rarely ever click the banner ad for fear of getting stuck in a near-infinite pop-up console maze. I have been fooled too many times to punch the monkey or click to optimize my browsing, only to be brought to a non-reversible advertisement. When the Internet was new, we clicked and read everything. Now the Net is corporate and we are jaded cynical consumers -- of course we tune out the ads.

Technology: Future advances in software and hardware may be one of the greatest threats to ad revenue. The creator of Gnutella, who now works in a subsidiary of AOL, has just released a program to filter out ads from AOL instant messaging screens. Ouch. Other similar programs can filter out banners and advertisements from web pages so that users can avoid the clutter and speed up their access. Just as Tivo replayers, in the TV broadcast world, have the ability to fast forward and skip the commercials, filter programs will screen out ads for the end user's consumption. Users can still rid themselves of ads the old-fashioned way and set their browsers to read just text and no graphics.

Another technological development involves the rise of network appliances and handheld devices. The small screen and limited bandwidth means that these devices will need to be selective with HTML content. Web ads and banners will usually not transfer well -- if at all -- to WAP and I-mode screens when they are simply repurposed directly from the Internet. Even clipping services on tethered devices like Palms and PocketPCs that synch with the web through AvantGo or dedicated servers will routinely mangle ads or ignore them altogether. For further insult, the content site registers only one page view from a dedicated AvantGo server that turns around and distributes the content to hundreds and thousands of other users synching with their PDAs. So the content site not only loses the ad impression on the end user but it also fails to get credit for the page views of hundreds of other users reading content from the one page view hit of the WAP, I-mode or PDA content server.

Game Theory: Ad budgets are a zero-sum game and so is the user's attention span. Advertisers want their message to go only to the top sites and focus their ad dollars on targeted groups. So portals and other ad revenue-based companies are competing against each other for a finite set of potential users and markets. Clustering occurs as large sites draw more momentum and users. Of course, the growth of new Internet users can compensate for this finiteness by feeding more potential users into the pool. Based on the growth projections of some Internet companies when valuing themselves, we would expect to see near exponential growth of users into infinity. Yet even with explosive growth of Asian Internet users, a few key players will get the lion's share of ad dollars.

Another source of competition for limited resources or users (and their viewing time) is other media. Once again, mobile wireless devices and PDAs make their presence felt. Users who have checked their news site in the morning through a PDA will probably be less likely to check the same online web content during the day. Just as cable television caused viewers to watch less free broadcast television, the Internet has caused people to watch less television in general. Users will still go online, but they may do so on platforms that are not ad friendly. How companies can reach these end users through their wireless devices and PDAs remains an elusive challenge.

Even the web itself faces competition from bots, P2P and meta-applications that will simply probe content sites and suck out the relevant data without the user ever having to see the ads that help pay for the content. Current ad revenue models fail to recognize these new technologies, which will continue to develop in the future. The use of XML will only accelerate this process, as agents and applications target data nuggets directly from web sites. If you were an advertiser, you would rather advertise on a much higher level of the content food chain, where these aggregator agents are.

The future of ad revenue remains unclear, but it's not the only issue that will force some deep thinking ahead. Digital content models also need to be revamped in the age of Napster. As with ad revenue, the question is how to monetize the content when technology has provided a free distribution alternative. Embedded ads, sponsorships, cross-licensing, tiered access and data collection fees are some alternatives being bandied about as supplements to traditional banner ads. A clear solution still has not materialized ... but like many things on the Internet, that could change quickly.


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