Slowly Grasping Online Advertising Model

A popular post at the moment is Andrew Chen's Your ad-supported Web 2.0 site is actually a B2B enterprise in disguise. I've been reading Chen's backlog for a while know, trying to come to terms with my slow and painful transition from a technologist to all round entrepreneur (well at the very least, more rounded in understanding of the game). Anyway, I thought I would try and provide a superficial (in my words) interpretation of Chen's post (corrective flames welcome).

General considerations of "have a business model", and more specifically in this case (Chen's post) promote a broader perspective than the "users" and "website" of the technologist. This involves abstracting beyond the specifics if the technology and the web property and consider measures, models, and a whole new nomenclature for describing the situation.

Some primitives to set the scene. Classical (my uneducated) startup notions are focused on building something people want to use and slapping online advertisements from an advertising network on there to cover costs. Ultimately as user focused hackers, you get paid based on some combination CPM (thousands of views) and CPC (clicks), and all kinds of in betweens. A broader perspective includes consideration of (1) the advertises that create the ads to promote products and brands, (2) agencies that interface with advertises that in turn may interface with advertising networks or publishes (hackers with websites) directly. This highlights firstly that a naive approach introduces a lot of links in the chain (people taking a cut) between you (website) and the money (advertises). As a hacker with a website you may take on the responsibility of the ads you serve, trying to optimize impressions and clicks. From a broader perspective, this is clearly fighting a misunderstood battle, because like any industry, middle men make all the real money. Chen highlights that success using this strategy requires a hell of a lot of traffic per month to be successful (meaningful profit). One of the comments of the post points out a venture capitalist attempting to curtail similar decisions of advertising grandeur, among other interesting observations.

Like a slap in the face, Chen proposes a shift in thinking for non-business hacker wannabe entrepreneurs. Firstly, he highlights that the typical next step for ad supported startups is to obviously kick the ad network and sell inventory directly to the agencies, and if your lucky, the advertises. Inventory (i think) promotes you to think about your website site as a property beside a freeway (internet), where you erect a massive building (webpage), on which you can lease advertising space for billboards. The bigger your building (popularity) the bigger your sign (visitors) and the more eyeballs you get on your billboard (inventory). Monetizing your inventory (I think) means how much of your visitors you can sell something to from which you get a cut. (The metaphor may need some work, but you get the gist.)

This last point is critical, because as Chen points out that you are not selling things to your users when you serve ads. Instead you are focused on making sure your users like your site and its features, you are measuring and tuning the adaptive fit of your software to its application. Putting online advertisements on your webpage is likely a complementary measure for your site to leverage the property you have created, like a celebratory endorsing a product. Your traffic translates into a commodity (inventory) which is valued based on the amount you can monetize. Chen points this out by suggesting that "the users of your website are not really your customers" under such a model, clearly your customers are the advertisement agencies and advertises interested in exploiting your users to make themselves a buck. You are just the sap leasing space, facilitating the process and pocking some cash on the side. Alternatively, Chen highlights that you can embrace such a situation, and consider your self a B2B operation, motivated to increase the billboard space and prominence.

What I found useful going through this exercise of analysing the perspective promoted by Chen of online advertising as a "business model" (surely not the first to make such observations), was simply the consideration of choice. Chen points out subscription, virtual goods, and e-commerce as alternative primitives to the advertising model. These examples immediately promoted my thinking about Flickr, the Second Life Economy, and Amazon, the consideration which for some reason remained out side of scope from my own ambitions until now.