Can “New Silicon Valley” Survive without Ads?

Silicon Valley Apocalypse

I’ll start by stating something that I thought should be obvious by now, nothing is free, especially when it comes to content and services. I’m not trying to be a Richard when I say things like this; I just feel like most of us are only paying lip service when we talk about valuing people, time, and hard work. We offer euphemisms like, “you can’t get something for nothing,” but when it comes down to it, we’ve all come to expect a lot of things for “free.” About online content and services, a lot of us consider our use of Google Maps, for example, to be free. But it’s not, we pay for the service by turning over our personal information, GPS location data, search history, etc., with all of that data being used to target advertising more accurately.

I want you to stop and think about this for a second, almost every service that’s “free” on a connected device is primarily a tool for selling us more stuff later down the road. I’m not saying this business model is new; I’m merely stating we’re in advertising overdrive since the transition to the digital era, and I’m not sure if it’s sustainable. When I talk to clients about the “New Silicon Valley,” I’m mainly expressing a shift towards the market share first, advertising next, business models that are sweeping through the region, and it’s all based on the perception that we’re getting content and/or services for free.

Over the last decade, a lot of companies have gone public without presenting a legitimate monetization strategy to investors; solely presenting market share numbers for users in the key, but never really profitable, demographic known as Millenials. Each of these businesses ultimately landed on the same business path to profitability – advertising. And with so many companies relying on advertising dollars to keep their metaphorical ships from sinking, I’m not surprised that the emergence of native browser, ad-blockers gave Silicon Valley quite the scare. 

The True Cost of Content

Dollar Bills

The whisper of the idea that companies are going to be forced to live in a world where ads won’t reach the screens of potential consumers sent chills down the spine of Silicon Valley.  If advertising revenue models went away, a lot of your favorite Silicon Valley darlings would plummet back down to earth as if their unicorn wings had been clipped, forcing them to sell their products and services for a hefty fee (Facebook would cost ~$168 year). This situation could be the ultimate demise of the companies, as no one really buys content or services anymore, as a matter of fact, no one really buys anything. I’m not even sure if it’s okay for me to admit that I miss the days when I handed over money and received something tangible in return.

“Between radio, television, print, online, and subscription services, how many advertising dollars are there to go around?”

I’m no Saint when it comes to using advertising as a part of a business model, especially when I’m subsidizing this blog with advertisements (is you see something you like, be sure to click on it), but there is no way there are enough advertising dollars for all of us to survive. It’s not as if producing content can ever be free, regardless of its medium, someone had to pay for it in some way. In the case of this blog, my time was spent writing this; time I could have spent growing other parts of the business, managing employees, or making sales calls.

Not only is my time worth some monetary value (I won’t mention my hourly rate), but not performing other activities in place of this blog also carries its own theoretical loss of value by choosing this activity over another. Unless this blog goes viral, the pennies on the dollar I’ll generate from advertising revenue will never be enough to make up for the cost of creating this content. And it’s for this reason; I would remind all content creators that advertising revenue is supposed to be a subsidy, not a core revenue stream (Google Search being the exception to the rule).

Great Services, Equals Great Profits

Profit Margin

In the midst of the “New Silicon Valley,” we can’t lose sight of the real problem; companies have yet to position their content and services in a manner that validates its monetary value on its merit. A situation that is especially sad when you consider the number of people that helped to create said content and services that go un/underpaid. At some point, the cost of content and services will have to garner enough revenue to sustain the businesses that produce it, leading back to an era when we didn’t consider “software a service.”

“There it is. I don’t believe software is a service –”

I’ve been dancing around calling it out this entire article, but now all the cards are on the table, so I can go hard to close this thing out.

I’m not old enough to call myself “old school” when it comes to service. I wasn’t around for the heydays of personalized service, or have the money to enjoy the convenience of a personal shopper, but one thing I do know is that service usually involves humans. Not software and a touchscreen, but actual human interactions. While software and automation provide vital costs savings to many businesses, they are also diminishing their ability to differentiate themselves from one another. Long term, this is going to be a problem. The only businesses that seem to be flourishing in the digital era, other than a handful of software companies, are those that generate profits through quality service.

In my heart, I believe there only a handful of companies producing content or software that is so unique that you can call them a service, and as the fear of failure looms for the rest of those companies that opted to play the “long game” with profits, they will find their backs against the wall in the coming years. You should start asking yourself, what’s the maximum your willing to pay for Netflix, Spotify, or any other media service? In the next decade, all those companies will have to figure out what that number is if they hope to survive.

 

 

The Net Neutrality Paradox

Net Neutrality

Concept Explained…

White Board ExplanationFor those who aren’t as familiar with the topic of net neutrality as us hardcore techies, I’m going take a minute to summarize (in Layman’s terms) what it is, and why you should care about it. If you’re reading this post, you’re probably one of the millions of people in the world who access some kind of multimedia via the internet. If you subscribe to NetflixHulu, Amazon Prime, SpotifyApple MusicPandoraDirectv Now, or any other streaming subscription service, you fall into the category of people I’m addressing and should make sure to read this article in its entirety.

If you have one of the subscription streaming services mentioned above, you probably enjoy access to thousands of music and movie titles via an internet connection that’s provided by a cable or phone operator, and until now, that hasn’t been a problem. Since the inception of streaming services, these companies that have been happily providing internet connections to your homes while adhering to a simple principle called Net Neutrality.

The principle goes something like this, as long as you are paying for the broadband service they’ve been providing, whatever you decide to download via that connection is up to you, and the Internet Service Providers (ISPs) won’t interfere with it. But more recently, the content consumers are streaming has inhibited the ability of those same companies to monetize their content, so now they’re lobbying the FCC to remove the rules that formalized the Net Neutrality principles in writing, enabling them to charge more for content coming through their pipelines that originates from competing services.

History Repeats Itself

Infinity Sign

You’ve probably been hearing a lot of techies trying to convince consumers that net neutrality needs to stay in place, and taken at face value, that argument would appear to be correct. But if you dig a little deeper, you’ll see that the abolishment of Net Neutrality could be the best thing for those of us who choose to access our favorite media via the internet. Let me explain.

Due to the fact it’s much easier to change services and equipment between wireless carriers than it is switch between ISPs, the wireless industry has always moved faster than the “wired” industry, and it’s generally pretty safe to look toward them for indications of how strategy changes will affect markets. It’s a bit of a canary in a coal mine situation, which I’ll sure the wireless industry would prefer wasn’t the case, but never the less, here we are.

It wasn’t that long ago that conversations with wireless executives about unlimited data plans resulted in executives stating, with 100% confidence, they would never have to offer unlimited data plans to their customers. Less than five years later things have changed, with wireless agreements including unlimited talk, text, and data, in addition to offering consumers the choice between Netflix, Hulu, and HBO. And now, depending on with whom you sign on the dotted line, a whole range of extras are available because of the addition of a new point of competition.

Unlike with ISPs, wireless providers compete head-to-head in almost every region, and the result of “true competition” has benefited customer across the nation, as the average cost of wireless bills has lowered when compared to 5 years ago. The removal of net neutrality on the wired side of the business would create a point of competition between ISPs similarly to how unlimited data plans affected the wireless industry. This assertion isn’t made without merit, as I remember the days before unlimited wireless plans were everywhere, and cell phone service providers were picking and choosing which particular content to include as a part of “data free” streaming. Can you see the similarity?

The 4K Factor

The availability of Ultra High Definition (UHD or 4K) content will probably be the tipping point for all of this due to the amount of internet bandwidth it requires and the lack of ability for traditional cable providers to offer it. If imposed caps and limitations on streaming content to our homes remain in place (there’s already a 1TB cap), consumers with 4K HDTVs and streaming source content to match will quickly start looking for ISPs that aren’t tacking on extra charges for owning the latest equipment and wanting to take full advantage of its capabilities.

The delivery of 4K content has become a more significant point of emphasis now that HDTV manufacturers have been ushering retailers towards selling UHD televisions in higher proportions than 1080p sets, and the transmission of these signal puts an enormous amount of stress on an aging internet infrastructure that streaming providers like Netflix aren’t responsible for maintaining. We can argue about the fairness of this arrangement later, but for now, we’ve reached the core of the Net Neutrality dilemma.

As the amount of data used to deliver 4K content to homes increases, inevitably, consumers will realize their home internet service plans more closely resemble the restrictive wireless data plans of the past than the newer unlimited data plans of the future. This dilemma will force the cable industry to choose which strategy to pursue in the same manner as the aforementioned wireless carriers.

The Rub

On the one hand, cable and internet providers could leave home internet services and Net Neutrality as it stands, collecting overages whenever customers surpass their streaming limit, hoping they can hold on long enough to figure out their own content system.

On the other hand, they fight to abolish Net Neutrality, unleashing an immediate flurry of competition that will undoubtedly lead down a rabbit hole to including everything but the kitchen sink to maintain video subscribers. So what can they do?

Let me know your thoughts in the comments section and time will tell if any of us had the right answers.