Tuesday, May 27, 2008

Some thoughts on advertising... from a tech guy

Phil Wainewright writes a blog over at CNET about Software as a Service (SaaS). SaaS is a very hot technology these days (and has been for a while). It's also one I'm intimately involved with as we're building our business around it.

SaaS is about application development so it's not surprising that many SaaS commentators (like Phil) end up talking about application monetization and hence, advertising.

Phil's stance is that the ad sponsored application model is fundamentally flawed. I agree with him, but not for all the reasons he states.

He lists three main arguments:

"1. Advertising is the creation of a disconnected era when businesses needed some way to get a message out to prospective customers that they couldn’t reach directly. The purpose of an ad is to motivate the prospect to get in touch. The Web, as we all know, puts us all in direct, real-time contact with each other, wherever we are in the world. Instead of advertising a message and waiting haplessly for a response, businesses can proactively connect directly with their prospects, reaching out to them in contexts where they’re ready to buy. What counts on the Web is product placement, merchandising and other forms of direct promotion."
Advertising wasn't created because we were 'disconnected', it was created because we were CONNECTED - connected in the sense that we watched the same shows, read the same newspapers and listened to the same radio stations. It exploited economies of scale as a many-to-one communication medium. It was/is not, as Phil seems to think, a sales tool. Most advertisers don't want people to 'get in touch', they want them to buy a product. This is just confusing the role of Marketing and Sales.
"2. Placing ads in software is the height of absurdity. It’s software for goodness sake — people use it to get things done, not to read ads. Instead of wasting valuable screen space publishing banners and text ads, why not embed some functional links, buttons and menu options that add some value to the task in hand? Cut out the ads and substitute a direct connection to a useful service. Add a pay-per-use clipart library to an online slideshow editor, embed a link to a live tax expert in an online accounting application, build workflow into an online travel booking service that conveniently helps the buyer choose and book flights, transfers, hotel and dinner."
Couldn't agree more. But there are some glaring examples of where advertising in apps does work. Gmail for instance. Contextually relevant adds alongside email topics are actually useful. Just as ads for clip-art, photo services, or design services would probably get a lot of traffic in an online presentation tool. Making ads relevant to the task at hand is the key. And the ability to mash-up services in apps could potentially blur the line between an ad and a service. Where does the ad stop and the service start? Desktop gadgets are a good example of ad/services that meld nicely with workflow.
"3.There will never be enough online advertising in the world to support the software industry, let alone the entire Web. Below is a slide taken from a presentation I gave a couple of years ago to an auditorium full of marketing professionals, called (you guessed it) ‘Web 2.0 and the end of advertising’. While it’s true that software is a smaller industry than advertising, both of them pale into significance when you look at the entire value of the retail industry — or even more if you measure the total value of a year’s global trade. Instead of trying to carve up the bite-sized advertising pie, on-demand providers should claim a slice of all those real-world transactions by making it easier for sellers to find buyers."
Agree. The most powerful monetization strategy is to match buyer and seller. But the potential pie is a lot smaller than Phil makes it out to be. Transactions completed online is a better yardstick than retail in its entirety, or global trade (that last one is really stretching it). And then all the easy apples have been picked - search, online auctions, online retail, local search, etc.

I think argument number two comes closest. Ads in apps are just stupid. Especially if they have nothing to do with the task at hand.

Phil finishes with an insightful paragraph on the future of monetizing worklflow:
"There needs to be a reliable infrastructure for measuring whatever is due to each partipant in the partnership, and there needs to be highly effective workflow so that the user experience is seamless and convenient. The ease of funding everything through advertising has meant the giants of Web 2.0 (and many venture-funded startups) have neglected the more sophisticated infrastructure needed to support such functionality."
SaaS companies participating in a web of interconnected services that support workflow and carve up the proceeds is the future of application monetization. This will triumph advertising every time. Pity it's almost entirely fiction at the moment.

But that will change.

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