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Nadworny: The Clicks Aren't Free

10/18/12 5:55PM By Rich Nadworny
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(Host) When Digital strategist and commentator Rich Nadworny looks at some of our new online businesses, he's reminded of the Dire Straight's song: Money for Nothing. But - he says - the clicks aren't free.

(Nadworny) Imagine that you decide to open a cookie factory because you bake the best chocolate chip cookies in the world. Since everyone loves your cookies, you decide to give away your cookies for free. People will love eating your free cookies; they'll talk about them and crave them. When people want to bake your cookies themselves, you give away the recipe for free.

A year into your cookie business, you decide that you need to earn some money. You'd like someone like Sara Lee or Freihoffers to just buy you out. In the mean time, you decide that you're going to embed a digital chocolate chip in each cookie, so that every time someone bites into one, an audio ad or a hologram ad will play. People will have to watch ads in order to eat your cookies. Instead of selling cookies, you sell ads.

If you pitched a bank or a venture capital company on this business plan, they'd laugh you out of the office. And yet, that seems to be a winning approach for many online companies.

The biggest story on Wall Street this year is Facebook's failed IPO. The fabled online company went public in the spring, and since then, the price of the stock has gone down by half. Facebook has annual revenues of about $1.5 Billion, not too shabby, but investment bankers have valued the firm at $100 Billion.

Facebook makes all of its money on advertising. Yet none of us, who go on Facebook and use it daily, do so because we like seeing Facebook ads. The ads have nothing to do with the experience of Facebook. The revenue, the advertising is based on that great dot-com-era term "eyeballs." The thinking is that the more eyeballs, the more money you can make showing terrible online ads.

Compare this with Silicon Valley and Wall Street darling Google. Google makes all of its money on online ads too. But its ads fit perfectly into its core business: Search. When Google sells you ads, it's to allow you to show a search ad on a search page. It makes perfect sense.

This year Facebook bought the photo social network Instagram for $1 Billion. When someone asked the Instagram owners how they make money, they replied, "That's a great question. We do not."

Facebook has about 950 million users. Imagine instead if they charged users only a quarter per month to use their service. For a price of one Starbucks latte Facebook could quintuple their income. Even if half of its users dropped out, they would still triple their income.

I have to believe that making something great, and charging a fair price for it, is good business. But I‘ve yet to meet anyone who thinks that what we really need is more advertising. So I have to wonder why this approach is making so much money for a few venture capitalists and online entrepreneurs.
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