Why Pay When Someone Else Will Pay For You?
For most of the company’s history, Microsoft has earned its considerable profits (billions of dollars each year adding up to a staggering
$130 billion in cash reserves at last count) from a direct sales business model. Customers of Microsoft’s products were also the people who purchased them and paid Microsoft directly. Sometimes the costs were bundled along with other purchases, but they were always there (a Dell laptop with Windows was more expensive than a Dell laptop without Windows). And you got exactly what you paid for: there was no try before you buy, freemium, buy one get one, rent to own, timeshare, or any other clever permutation. It was a straightforward, direct transaction between the customer and Microsoft.
But the Internet brought forth an entirely different way to charge for your products: making them
advertising supported. Instead of asking the actual users of your products to pay for them, advertisers (who were not your customer and didn’t use your product) bore the cost of the service indirectly. Advertising had long supported many forms of media content (mainly TV, newspapers, magazines, and radio). But one company took advertising to frightening new heights by using the Internet to funnel the half trillion dollar global ad market in ways previously unimaginable. And that was Google.
Leveraging the scale and reach of the Internet, Google brilliantly turned the advertising engine onto new product categories that had historically always relied on direct sales: email (Gmail), telephony (Google Voice), operating systems (Android), and more. Take in-car navigation as an example. With Google Maps on your phone, an entire industry evaporated within a year as consumers completely stopped directly paying for maps and directions in their cars because Google now offered it for free. Pretty soon, it looked like everything could be ad supported from
helpdesk software to coffee to airline snacks and more.
While foolish in hindsight, at first the wave of ad supported companies was something Microsoft could justify ignoring. The Internet was a leisure platform for reading news, buying books, playing fantasy sports, and other small, entertainment activities. Certainly not something on which meaningful business would ever be conducted on. And when Google went public in 2004, the entire US paid search market was
$2.5bn for that year. A drop in the bucket for Microsoft who at that time was doing $3bn in revenue… every single month.
Over the next few years though, it soon became clear that ad supported businesses weren’t just a competitive threat to Microsoft. They were an existential threat because consumer behavior was changing from expecting to purchase directly, to expecting someone else to purchase on their behalf. And then Facebook came along with growth unlike anything ever seen before to create an
advertising duopoly with Google as all Internet activity flowed through the front doors of those two companies. The dominance of ad supported businesses was cemented. Companies that had the audacity to charge users directly would succumb to their “business with a reputation for bad economics”, as you just can’t out execute someone with a better business model. Simply put, how does a company that charges users directly for a product, compete with a company that finds someone else to pay indirectly for the same product?
But that’s not how I believe the story will end, with all businesses moving to ad supported models,
because ads suck.