In defense of ad-based business models

In the past I have been a strong advocate of web business models a la 37Signals, where you get to charge your users for a product or service that is provided. I still believe deeply in the viability of such an approach when it comes to making money online (in fact ThinkCode.TV will essentially do just this) – after all it’s the Internet equivalent of what we’ve been doing for thousands of years offline.

Recently however I’ve been reflecting on the ad-based alternatives that I’ve tended to dislike in the past, as a sentence in John Gruber’s recent article really stroke a cord with me:

Undeniably, there is money to be made in digital publishing with free reader access, but whether that revenue leads to profits depends upon the scale and scope of the organization. The potential revenue does not appear to be of the magnitude that will support the massive operations of existing news organizations. What works in today’s web landscape are lean and mean organizations with little or no management bureaucracy — operations where nearly every employee is working on producing actual content.

He is right. Ad-based models are generally not going to make huge amounts of money and therefore be able to satisfy your grandiose dreams of wealth. You’ll have to keep your team “lean and mean”, and cut down on expenses as much as you can. This is true for any business, but there is little margin for spending extravaganzas in this particular arena.

So long as you are not kidding yourself into believing that you’ll make it big, free sites that sustain themselves through sponsors, ads, and reputable affiliate programs like Amazon, are still an option that’s worth keeping on the table. And this business model doesn’t have to be exclusive, it could easily be mixed with others, like some bloggers/writers do when they promote an e-book they’re selling to their audience.

Last year, without trying to become a new media “conglomerate”, I saw several sites of mine generate a bit of revenue on the side. I ran these sites entirely as a hobby. Yet, come tax time, I figured that last year I made $4000+ from these sites, which happen to be three or four relatively unknown blogs, that get updated sporadically whenever I have the time.

These are small, somewhat uncultivated online “properties” that are fairly under-optimized. I know I’m leaving money on the table. What would happen if I were to have a more business-minded approach in terms of managing them? For example, I could optimize them for SEO/SEM, strategically position and A/B test ads, actively pursue new sponsors, post on a regular basis every other day, invite external writers or pay for some highly sought types of articles, and so on.

My guess is that I wouldn’t get rich even if I took these steps, but I could generate a fair amount of extra income every month. I’ll confess that this idea is tempting me, not just for the extra money, but also for the hidden benefit of having several distinct audiences that I could reach. Not to mention, the thrill of watching those online “properties” of mine, and any new ones that come along, slowly grow and become more useful to my readers. Pulling this off would require hard work in my limited spare time, but it could be done.

DHH recommends building a “small Italian restaurant on the web”. And I agree, but I’m starting to believe that building a “small publishing company” of one’s own on the web is a valid alternative.