Thinking About Ad-Based Business Models

This week saw a furor over, a service which offers to unsubscribe users from unwanted emails but which apparently sold user data to Uber in the past in a way that wasn’t transparent to users. The reaction to the revelations was predictable: some decried all ad-based business models using cliches like, “if you’re not paying, you’re the product”, while others said users were naive for imagining a free service wasn’t monetizing their data in some way. Every time I see this happen, I wish we could get beyond the simplistic painting of all ad-based services with the same brush and have a more nuanced conversation about ad-based business models.

User/Customer Alignment

I wrote a piece for Techpinions almost three years ago about business models and it’s worth referring back to it. In that piece, I talked about three broad categories of business models and the implications each has for what I called user/customer alignment. What I meant was that, under some business models, users and customers are the same people. Under others, the paying customers and the users are actually different sets of people. When the latter happens, there can sometimes be tensions between the needs of those two sets of customers over privacy in particular but also over other issues. That’s particularly the case for ad-based business models which rely on learning as much as possible about users in order to better serve advertisers.

That’s a tension many users are willing to live with in return for what’s usually a free or heavily discounted service. Google’s seven billion user products (Gmail, Android, Chrome, Maps, Search, Youtube and the Google Play Store) all. to some extent. rely on capturing user data to drive its ad business. But none of them would have a billion users unless those users found some value in the service and were willing to make some tradeoffs in terms of being tracked and shown ads. There’s a reasonable argument to be made that not all users understand those tradeoffs fully, but our recent privacy surveys (covered here and here) suggest most users actually do have a decent understanding and are willing to make these tradeoffs anyway, while a minority eschew these services because they’re not willing to do so.

Misunderstandings over Data and Ad Businesses

Importantly, though, ad-based businesses almost never sell user-identifiable data to third parties. That’s not their business model and it would be counterproductive. Instead, they typically either aggregate or anonymize that data before selling it or don’t sell it at all but rather simply use it to target advertising. Even wasn’t selling identifiable user data because Uber only wanted to know how many people were using Lyft, not which individuals were. It still breached users’ trust by looking into the content of emails in a way users didn’t know it would but that’s technically a different issue.

The recent blowup over ISP privacy regulations also led to some comically bad misrepresentations of what ISPs might do with users’ data, with one prominent individual offering to buy individual Senators’ browsing history, as if such a thing were possible (it isn’t). But that doesn’t stop people from ignorantly or deliberately misrepresenting what’s happening with ad- and data-based business models.

Creator/Customer Alignment

Another aspect of ad-based business models we’ve seen in recent months is actually yet a different form of tension. This time, not between the end users and advertisers, but between creators and advertisers. We’ve seen that tension in the boycott of YouTube and Google over ads appearing next to problematic content. In attempting to resolve these conflicts, Google has repeatedly sided with advertisers over creators in tightening standards for where ads can appear, both on YouTube and in its AdSense program, all of which has affected even legitimate creators’ ability to monetize their content.

The desire to sell advertising can therefore sometimes lead ad-based businesses to put users and creators of content second. But, whereas users have few alternatives to YouTube — by far the biggest online video site in the world — creators are starting to find alternatives for monetizing online video. But those alternatives are mostly other big ad-based businesses like Facebook, so the cycle is likely to continue to some extent.

Direct Monetization Solves Most of these Issues

The other two business models I mentioned in my original piece were direct business models – where the company sells a product directly to end users – and platform business models under which the company sells third party products and services to end users. Both of these have better user/customer alignment, with direct business models having 100% alignment between those two groups. Platform business models can still create some tensions, typically between the platform owner and the content owners over the revenue share or cut the platform takes of gross revenue. But the direct business model solves most of these tensions by making the value proposition to the user simple: buy a product or don’t.

This straightforwardness makes direct business models attractive to many – you know what you’re getting and you choose, at every step of the way, whether you want to continue to pay for the privilege. But it may mean paying more for the product in some cases because it’s not being monetized in other ways, although that’s again a tradeoff many customers are willing to make. On the other hand, some businesses try to mix the two, sometimes with bad results – Google’s recent introduction of paid promotion on its Google Home device is an example. When people pay for a hardware product like this and there’s no mention of advertising at the point of sale, it feels like much more of a betrayal when it does show up because it wasn’t part of the bargain.

The Price/Tension Equation is Key

That price/tension equation is key to the fight over the future of consumer technology. Of the biggest tech companies, some are choosing to go down the direct business model path, with Apple, for example, largely abandoning advertising as a business model across its products in the last year or two, while others, like Google and Facebook, continue to derive the vast majority of their revenue from ad-based models. Each will find an audience willing to make the tradeoffs inherent in their business model, whether sacrificing some privacy for a low price or paying a premium to avoid making that sacrifice. But I expect we’ll see many more examples of the tensions inherent in ad-based business models as the consumer technology industry expands into markets where many don’t have the means to pay the privacy premium.

Published by

Jan Dawson

Jan Dawson is Founder and Chief Analyst at Jackdaw Research, a technology research and consulting firm focused on consumer technology. During his sixteen years as a technology analyst, Jan has covered everything from DSL to LTE, and from policy and regulation to smartphones and tablets. As such, he brings a unique perspective to the consumer technology space, pulling together insights on communications and content services, device hardware and software, and online services to provide big-picture market analysis and strategic advice to his clients. Jan has worked with many of the world’s largest operators, device and infrastructure vendors, online service providers and others to shape their strategies and help them understand the market. Prior to founding Jackdaw, Jan worked at Ovum for a number of years, most recently as Chief Telecoms Analyst, responsible for Ovum’s telecoms research agenda globally.

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