5.07.2014

Terminal Ubiquity (tm). When everyone offers it no one needs to buy it...

This photograph is unique to me because it is my own kid.
He's running a cross country race in the Texas heat. 
The image reminds me (as if I needed reminding) that  
he is a great son. 

I read too much. But I kept reading things that reinforce some thoughts I've been having. One is that when everyone pursues the same goals and everyone has a horse in the race at some point whatever is offered becomes truly ubiquitous, loses the values that make it special and reinforces a commodity expectation. Take online advertising for example. The early and ongoing promise for companies advertising on the web was that, like early TV, people would be magnetically attracted to content and would complacently look at any advertising a company cared to pair along with the paid content. In the earliest days this meant absolutely horrible banner ads and then pop-up ads which led users to invent ways around the pop-ups while helping the target market become immune to even acknowledging the banner advertising. 

But, of course, the web is built around the pervasive idea that everything should be free and that content will drive profit everywhere. As an example this blog is hosted for free on Blogger which is a Google service. Google monetizes the "bold" Blogger experiment with Google Ad Sense. That is the part of Google that generates lots of innocuous, little ads that bloggers can choose to sprinkle around and through their content. The ads, theoretically, will pay for the cost of maintaining Blogger and also return a profit to Google. Not sure how that's working out. I tried working with Google Ad Sense in the early years and the system placed a number of totally unrelated or competitive ads on the site and returned less that ten bucks, total, to me as their affiliate. At some point Google may decide that the decade of blogs is over and shut the whole thing down. That's one of the downsides of stuff being free, you don't ultimately have any control over it. 

But what really got me thinking was a news story I heard about Alibaba, the giant Chinese company that will be going IPO on the NYSE sometime soon. The company is into everything, and it sounds like a blend of Amazon and Google but the operating theory is all about selling advertising. The products are secondary or even loss leaders for the service, it's the advertising space sales that currently bring in the revenue. And that's their business model. And Twitter's business model. And Facebook's business model. And DPReview's business model. And Yahoo's business model. And Pinterest's business model. And Instagram's business model. And everyone else's business model. 

It's almost gotten to the point where everyone's business model, no matter what service they provide or trinket they push, is really all about selling advertising surrounding the service or trinket to other businesses around your neighborhood, your city, your state and your country. But if everyone everywhere is selling advertising space does this mean that the market for advertising is infinitely scalable? I don't think that's really possible. 

I get that there's room for growth in emerging markets but the trend in the U.S. period already points to both deceleration and declining web ad revenue. The media buys are already too fragmented to achieve perceptible, measurable momentum and results for any but the most enormous marketers and, the fragmentation of the market continues unabated. Twitter stock recently took a big dive because investors are unsure how adding more advertising in yet another space within an already over crowded market will ultimately drive profitability. I'm sure the same will follow along for most of the purveyors of user generated content spaces because of the sheer amount of space available. 

It all comes down to supply and demand. When ad space in a demographic sector (high capacity web users, hipsters, middle America Online ) becomes closer and closer to infinite the value of said space drops to nearly zero. A recent example is as close at hand as stock photography. Once upon a time stock images were hard to find, hard to get and hard to physically deal with. Now they are just electrons, they are sourced directly from your mom and your daughter and your Facebook pages and tens of millions of free stock image generators. The search and delivery is totally automated and we can now access billions and billions of images at the click of a touch pad. The supply has gotten closer and closer to infinite and so now the value has dropped to nearly zero. Supply and demand. In fact, Getty is giving most of your stock photography away free because they too believe the mantra that the key to profitability is to sell advertising space and they are using their product (your product) as a "loss leader" to drive eyeballs to their site in order to capture enough data to convince all the same prospective advertisers everyone else is chasing about the wonderful value of their space. 

Wouldn't be surprised in the least if Amazon was making more money in the placement, advertising and marketing of the products that they sell than they do in the actual margins on the products you queue up to buy. Wouldn't it be bizarre to find out that your camera purchase or your purchase of Nike running shoes on their site is partially subsidized by advertising revenue delivered by selling space on their own site to their own merchants. Even if it is a less than direct methodology. 

But let's dive a little deeper and see what we think the end results might be.... So, imagine a publisher starting a newspaper in a big, literate town which currently has no newspaper at all. They bring in a staff of reporters, designers, layout people, editors, sales people, distributors and all the rest. A big investment. But...they have an exclusive market for their style of advertising: Display ads in among the (riveting) content as well as consumer (user) generated ads in the "want ad" area of the paper. The newspaper makes a good profit. Which attracts another newspaper that comes in with the same basic offers and the same space. They split the market and both papers make a profit, although now the overall profits to both are reduced.

Now imagine a metro market of half a million people who are offered two thousand newspapers. All with very similar content. All with very similar ad space that is moving toward infinite availability. There are not nearly enough advertisers to go around (not enough demand) so the papers start price wars in attempts to get more of the market share. The prices drop because there is a huge supply of space resources and no increase in overall demand. As the ad space nears infinity the revenue from that ad space effectively approaches zero. But if the quality of the content remains the same that means costs remain fixed. 

So, now the papers have two options. They can try to institute a much higher price subscription paradigm but they quickly find out that they have done a good job teaching their target markets (both advertisers and end consumers) that all information and ad space should be almost free (remember that the ad revenue was supposed to be the driver that paid for the overhead). The other option is to reduce the cost of content. They could do this by crowdsourcing the content and laying off their pro staffs but in the end they may find that the unvetted and unreliable content is no longer good enough to drive consumers to consume the papers in enough numbers and with enough loyalty to lure advertisers into buying ad space to reach said consumers. 

At some point, across the board, the revenue starts to zero out. When the revenue starts to zero out the entity can no longer afford the content that drove the site in the first place. Or the market they once enjoyed in an almost exclusive way is now split between hundreds of very similar vendors, most of whom did not have to bear the same costs and time investments to create the market at the inception. 

This then triggers Kirk's immutable law of virtual content and virtual delivery economics: Terminal Ubiquity (tm). Infinite, nearly identical offerings, drive markets to zero profit. When they approach zero profits the ability to supply differentiating content also vanishes and creates a death spiral for that particular industry.

While Amazon.com may be doing well now imagine how much different their battlefield will be when there are hundreds and hundreds of nearly identical marketers, some subsidized by the governments of their countries of origin, all competing for the same high value customers. Delivery costs can't be driven to zero. The cost of actual product is just as inflexible. At some point the margins will fall to unsustainable levels. As they have in royalty free stock photography, video tape rentals, office supply stores, camera stores (outside of the three thriving U.S. markets) and many other businesses. 

When all of the web based businesses realize that Kirk's rule is also inflexible, that ubiquity drives out profitability, they will either have to offer consumers products with embedded value or they will have to exit the business. The point at which the profit/saturation curve crosses over is falling due for a number of players. Call it a bubble. Call it a thinning of the herd. The bottom line is death from Terminal Ubiquity

As an adjunct to the idea that this is a business model failure only of big social sharing and information websites it would be wise to apply these ideas to every other kind of business extant. The Chinese and Bangladeshi workers offer nearly ubiquitous labor which destroys the  markets in other countries for the manufacture of clothing. Photographers offer their work free to magazines and clients in the hopes that it will generate future, paid, work. It's a cycle that is also unsustainable. 

At some point someone will have to make something that other people would like to have. Something that can't be imitated easily. Then real profit will be returned to the businesses and they will prosper. Right now most web businesses are running on an unfulfillable promise. Infinitely scalable advertising space needs.  And we have a good idea of where that will end...

11 comments:

Jim said...

That sounds like a corollary to the idea that time slows as you approach the speed of light. You need to grow a toothbrush mustache and let your hair grow out wildly.

Seriously though you are correct. We are moving more and more toward a society that consumes 'virtual' products. At some point those products become so ubiquitous that consumers (hopefully) will start demanding something more substantial for their money.

Anonymous said...

When I was a kid, Los Angeles had four daily papers (both morning and evening). Now we have the LATimes, both print and 'net editions. The 'net version will soon be behind a paywall (just like the NYT). I wonder how long it will be before they drop the daily print edition (the Sunday paper should survive).

!5-20 years ago the cypherpunks were talking about micro-payments. Now we may soon get there. Want to read a post on David's, Zack's, Mike's, Thom's, Kirk's or Chase's blog it will cost you .005 cents. The streaming music channels could sell for .10 an hour. A lot of free has to go away. DPReview should remain free, but only because they are owned by a mass-mareter.

Anonymous said...

It's a gold rush, and like gold rushes historically, more losers are produced than winners, as well as a lot of fool's gold

Saul Molloy said...
This comment has been removed by a blog administrator.
Robert Roaldi said...

We're all TV stations now.

Anonymous said...

Cute retort...

Paul

Nick Davis said...

Totally agree with this analysis. The situation is unsustainable. Even in the field of paid for goods for example, here in the UK Amazon is often the most expensive option these days, and they are frequently undercut by smaller nimbler competitors on their own market place. True they get a cut but they seem to be transforming into a gateway rather than a direct seller.

Dan Higgins said...

Kirk Tuck said...

amolitor said...

Kirk Tuck said...