As great as the economizing potential of the internet is, we must be careful not to put our stock (literally and figuratively) in unsustainable or doomed business models. The “dotcom bust” of the late 90s was a mild economic crash caused by entrepreneurs getting excited by the potential of this new medium of the internet – excited enough to put billions of dollars into hundreds of ambitious companies like WebVan, an online grocery shopping site, and boo.com, a fashion retail site with a 3D avatar (from PCWorld’s The 25 Worst Websites), which promptly went bankrupt without sustainable business models.
If history teaches us anything, it’s that people don’t learn from history. Whereas the first dotcom bust was limited in scope because it burst before it could build itself high enough to do any serious economic damage, the internet at large seems to be headed for another, exponentially more massive economic bust barely a decade after the first, for exactly the same reasons.
The company that pioneered this business model has become immensely popular in recent years, and has skyrocketed in stock value from an initial $85 just over 2 years ago to $401 as of this moment (CNN Money). It has pioneered amazing innovation in areas such as webmail, sattelite photos and maps, and most obviously, websearch, all from a single income source. The company? Google, and their income solely from advertising.
Now Google is an amazing company, but it exhibits remarkable similarities in many ways to doctoms of the late 90s. For example:
- Vastly inflated stock prices due to investor excitement over an income method
- Extravagant spending: The Googleplex campus is equipped with a fleet of Segways, an army of masseuses, all-you can eat snacks nearly everywhere, and free meals provided by the former chef of the Grateful Dead, who has since left Google (CNN)
- Gigantic investments with no revenue potential: Google has bought the companies Keyhole (Google Earth) and Sketchup (a 3D modeling program), and has developed programs like Picassa and Google Desktop – none of which bring in any revenue
On the consumer end, people are becoming less and less tolerant of advertising. No matter how targeted ads may become, most people simply ignore anything that looks like an ad – and the particularly savvy users may block them completely. Programs like PithHelmet for Safari and Adblock for Firefox are becoming increasingly popular as people get increasingly sick of online advertisement. Advertising is unpredictable enough to obfuscate any earnings that may come from it indirectly (for example, did a user visit this site because of an ad, or for another reason?), but eventually advertisers will realize that the cost of advertising isn’t made up for by increased revenue.
In addition to decreased revenue from placing advertisements, there’s an increasing market for clickfraud, increasing advertiser costs with zero increased revenue. According to the article, it’s a booming business despite efforts to squash it, and advertisers are signing off en masse because of it.
Whether this happens all at once or gradually, it’s practically inevitable that it will happen. Google can’t last forever on an advertising supported revenue model, and whether its fortunes crash or crumble, the impact will not be small. Thousands of sites are supported solely by advertising money paid out by Google, Yahoo, and other advertising providers, and in many cases make a good bit of money off it. Advertising money from displaying ads is becoming more popular as a business model for immensely popular sites like Facebook and Youtube, and most of the internet makes money in some way or another from ads. Even this site displays Google ads for some quick money (though it’s hardly dependent on them; I’ve made all of $9 so far). Sites like these dependent on ad revenue will go down with Google and the other ad providers that pay them, leaving a scarred internet and a broken economy.