Tuesday, November 01, 2005

How "Internet Advertising" Becomes an Oxymoron in an Entangled Everyone-to-Everyone Network

Google's meteoric rise on the coattails of its newfound business model--algorithmically optimized pay-per-clickthrough advertising in a search-relevant context--is eyepopping for Wall Street investors, Main Street executives and Madison Avenue advertising firms alike. I applaud the company's focus on steering engineering and science talent into creating an expansive list of innovative applications, but at the same time I sense an ominous cloud being stirred by foreboding winds on the horizon. In this post, I explain what I see as the beginning of an oxymoronic disconnect in the term "Internet advertising," being driven by a broader trend that will have disruptive implications on who profits from the Internet.

The key idea is the network: In the 1980s, Microsoft and Intel brought us PCs, and in the 1990s, Cisco gave us the routers and networking hardware to tie our PCs together. This laid the physical foundation of the network that enables us the communicate "over the Internet." Riding on top of this physical network, all participants--large corporations, smaller merchants and consumers--become "nodes" connected to one another through an increasingly intricate web of "links."

Based on the state of the Internet today, we can classify the market leaders in a network context by looking at the business models of their core competencies (defined here as the area from which they derive the bulk of their revenue):

  • Amazon (market cap: $17 bil.): "One-to-many" model of providing a single virtual storefront for many consumers to shop from the convenience of their own homes for books, CDs and so many other products;
  • Yahoo (market cap: $53 bil.): "Few-to-many" model of sourcing traditional content from a few providers and arranging it in a user-friendly way for many users (Note: This is Yahoo's historical core competency; however, Yahoo currently derives more revenue from the many-to-everyone ad model listed beside Google below);
  • eBay (market cap: $56 bil.): "Many-to-many" model of connecting many sellers to many buyers via auctions of used items, new goods and even non-goods;
  • Google (market cap: $106 bil.): "Many-to-everyone" model of selling ads to many merchants, large and small, through placement alongside search results, blogs and other content being viewed by everyone who uses the Internet.

Note the close correlation between market capitalization and effectiveness of business model in exploiting the network to its fullest. Clearly, the many-to-everyone model for distributing ads carries the most value, as evidenced by Google's market cap now in excess of $100 billion.

The sheer number of nodes and links in the overall network is increasing daily as more and more users find their way onto the Internet. Even more importantly, as Internet usage grows, the ratio of links-to-nodes also increases. This "ratio growth" may be viewed as an enabler of new businesses:

  • Sparse network: A low links-to-nodes ratio is sufficient for destination shopping and web surfing. Consumers go to Amazon for books and to Yahoo for news, stock quotes, email, etc.
  • Dense network: A higher links-to-nodes ratio gives eBay its stickiness and high barrier-to-entry, allowing users to connect to one another to buy and sell everything and anything. Google acquires value by serving up ads connecting large and small advertisers to more and more people who use search.

Extending this train of thought, the next logical step of evolutionary development ought to be an entangled everyone-to-everyone network, i.e., a network with a very high links-to-nodes ratio in which everyone is connected to everyone else in a useful, productive way. We can already see aspects of this type of peer-generated content and value emerging in some parts of the services the Internet leaders offer:

Amazon: Book reviews and usefulness ratings by peers
Yahoo: Instant messaging, message boards, groups
eBay: Customer ratings of merchants for self-policing against fraud
Google: Machine learning from URL linkages and user search behavior

In an entangled network, everyone (not just retailers, traditional content providers, merchants and search sites) becomes a producer of content, contributing across a wide spectrum of activities: building websites, blogging, writing reviews, posting comments, sending messages, voting, or merely surfing and searching the web. Through this collective process, peer-generated information, both individually and in aggregate, becomes increasingly valuable--which leads us to an important implication.

When everyone's opinion begins to count, we transition into a world that reveals the quintessential spirit of the Internet--a decentralized, highly interconnected network; a dynamic, level playing field without any controlling nodes. In such a world, corporate advertising pales in importance to peer opinion. Instead of being swayed by corporate-driven unilateral ads, we make our decisions through participating in a peer-to-peer "conversation" in which we share comments, tags, opinions and purchase decisions. Implication: the flatter the network, the less value ads have.

Now, back to Google: How can an ads-based business model survive in a peer-to-peer world where bilateral user opinion counts more than unilateral corporation-to-consumer ads? I cannot predict how many years it will take the Internet to undergo its upcoming irrreversible "phase transition" into an entangled everyone-to-everyone network, but early signs of its coming already lead me to doubt the robustness and longevity of oxymoronic "Internet advertising." Google has done wonders to help us find information on the Internet and is being generously rewarded by the market for its innovation. My guess, though, is that the ads jackpot at the end of the rainbow will look a lot smaller in 20/20 hindsight when we truly become entangled in the everyone-to-everyone network we are all now so busily creating!


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