After the Great Recession: What Will The Internet Look Like?

As we plunge further into the Great Recession, it’s natural to wonder, like Alice falling down the rabbit hole, what the world will look like when we land.

Other bubbles have left behind an excess of infrastructure that would later come in handy: railroad tracks, telegraph lines, Internet fiber. What will we have to show for this one? Some have suggested little more than a string of weedy Gulf-Coast ghost towns.

It’s hard to accept that that’s it. For all that we’re going through, we have to believe that we’ll come out changed in some important way, hopefully for the better.

So here on the Redfin blog, we’re publishing a series of posts on how different parts of the world we see flying by are different than the ones we had before: the Internet, the startup economy, the media and the real estate industry. Today we start with the changes that we have already begun to see on the Internet.

The Return of Software
It will come as no surprise that we are glad to see startups consider business models beyond free ad-supported sites. In July last year, we had complained that free software had become “Silicon Valley’s new religion,” an “adolescent anarchism” codified into a broad ideology that couldn’t apply to every sort of online business, particularly those that don’t reach a huge audience. Now 37Signals has joined the charge.

The reason for this is the pressure on startups to generate meaningful revenues now, even at a modest scale. It was easy once to raise money on the idea that your business would work at Yahoo’s scale, particularly if your goal was to get bought by Yahoo.

Google encouraged this behavior, by rewarding sites with more traffic that presented information in a generic way its indexing robots could understand, free of charge, rather than in the context of an application or for a fee. But now that fewer companies are buying and venture capitalists are wary of footing the bill, startups have turned to the most direct way to get money: from their users.

The iPhone App Store: Proof That Consumers Will Pay for Software
Consumers are ready to buy, buying software fast-food style on the iPhone, and shelling out for premium subscriptions on sites like Picnik and Animoto. And e-commerce businesses are enjoying a new vogue too. Three venture capitalists have approached an e-commerce company we know of in the past week, even though it isn’t raising any money now. Already, one entrepreneur in our building has recently shifted from a pure ad-driven model, and at least two others we know are planning to as well.

Commerce is How Software Makes Things Better
This is good news for the economy. Direct commerce is the simplest way for the web to do what technology is supposed to do: make something cheaper and better, usually by cutting out a middle man, not by creating a new one. Even though transactional businesses scale more slowly than media sites, they generate more revenue per website visitor — based on our experience in online real estate, by a factor of at least three to one.

Media Sites Become Web Applications
And it’s good news for software too. There’s a reason it’s hard to build great ad-supported software. For most ad-driven websites, the goal isn’t necessarily to engage an audience in the completion of any particular task so much as to redirect it toward a purchase on an advertiser’s site.

This is why, to take just one example from our world of online real estate, many ad-driven sites only show one photo of a home for sale, where we show 15. We want you to stay on Redfin until you buy the home. The media sites have to let you visit their advertiser’s site for more info.

MySpace and Facebook: Media Site vs. Web Application
This difference in approach is why MySpace can be a bit of a disaster zone for users but makes plenty of ad money, whereas Facebook is a powerful “social utility” that can’t get top-dollar for its ads. MySpace as a media site is just one page after another, like the New York Times as written by your teenager, on drugs. In Facebook, the pages are components of an application, working together so well that you never want to leave, even if it’s to visit an advertiser’s site . It’s no accident that MySpace is based in the media capital of the world, Hollywood, while Facebook is in the software capital of the world, Silicon Valley.

I’ve often wondered why Facebook doesn’t just charge people to stay on its site, since that’s clearly the intent of their web development, and it’s clearly what their users want to do too. A Flickr-style fee for storing additional photos or messages could perhaps generate more than $1 billion in revenue, in a way far less intrusive to its users than Facebook’s past ad-related blunders. Maybe that will happen soon, too.

This is not to say that you can’t build beautiful ad-driven sites, or that you can’t make money from those sites. The web is by far the world’s most powerful advertising medium. But it’s much more than that, too.

But what do you think? When this Great Recession has done its worst, what will the Internet will look like? Will the revenue pressure on web startups make it more mercenary, and less fun? Or will it just make it better? It’s hard not to believe that  a little less media and a few more web applications will make the Internet richer, and better.

Discussion

  • http://blueroof.wordpress.com Greg Tracy

    Glenn,

    Your (not specific to Redfin) posts are the ones I most look forward to reading. You are a witty, fun, and informative writer who adds a great deal of thought and personality to all of your contributions.

    You don’t stir the pot and incite debate (dialogue) like you did before, but you are still entertaining and just as cool as ever…

    Greg
    BlueRoof

  • Kirill Sheynkman

    Glenn, our mutual friend David Lichtblau and I were talking a few months ago about software revenue models. Since we are both in our early 40s and have come from a long history at big (or small becoming big) software companies, we felt a bit out of sync with the “give it away and make it up on volume” principle.

    I ended the discussion by saying… “So, the revenue model is this: I have something that you actually want to buy, and if you give me some money, I will sell it to you.” We both looked at each other stunned by the profundity of the statement.

    Things are free for MEDIA companies (like free TV paid for by ads) and even given that I can get free TV, I am paying for cable and more for HD cable. I am PAYING money because I want my 50″ TV to show “The Bachelor” in HD :). I am also PAYING for Tivo, PAID for my SlingBox.

    There is a great public library in New York and in San Francisco (two places I live), but I PAID for my Kindle 1 and 2 (and all the books on it). I BUY apps at the App Store for my iPhone. I have been PAYING Blizzard every month for the last 3 years for my World of Warcraft account and BOUGHT all of their upgrades (11 million people do the same because the game is insanely sweet).

    At work I PAY for Adobe CS4, because it’s great. I PAY for FlexBuilder and Visual Studio. I PAY for Camtasia — because they are great products.

    See, it works for the consumer too… build something of value, and people will actually PAY for it. It’s not just about banner ads. Call it old-fashioned, but that’s my take.

  • http://blog.redfin.com Glenn Kelman

    Great comment Kirill. Regarding WoW, it’s interesting to compare it to the fashion in game development these days, which is to churn out a large number of half-finished games to increase your odds of finding (and then finishing development of) a hit. The person running the studio is himself like a venture capitalist, spreading his investments across a portfolio rather than working to make one game really cool. Speed kills, and Reid Hoffman is right that version 1.0 of any product shouldn’t be perfect, but it seems that hit-driven software development is just a crisis of confidence. Which I doubt you have ever had.

  • Thomas Young

    I disagree strongly that “Consumers are ready to buy, buying software fast-food style on the iPhone, and shelling out for premium subscriptions on sites like Picnik”. The reason is simple and comes from economics: the marginal cost of producing software is essentially zero and in a truly competitive market this would drive the price down to zero as well. So essentially what I’m saying is: yeah people are willing to pay for software, but only until a free alternative is developed. If there is some non-software benefit like the storage and display of your files or some aesthetic appeal, then this might not hold true, however.

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  • http://blog.redfin.com/blog/author/glenn%20kelman Glenn Kelman

    Good argument Thomas! But don’t people buy movies, games and music? I just wonder if the number of people willing to offer a free alternative so as to build market-share is declining?

  • http://blueroof.wordpress.com Greg Tracy

    People will pay for a superior product, delivery, or experience and without revenue you can’t continue to upgrade or innovate.

    It’s the reason there are different pricing models in all industries (such as real estate);

    Sometimes you get what you pay for…

  • Kirill Sheynkman

    RE: “The reason is simple and comes from economics: the marginal cost of producing software is essentially zero and in a truly competitive market this would drive the price down to zero as well”

    Well, the reason is not that simple. Look at the financial statements of software companies… say Microsoft and Oracle. Yeah, they are rich, they are ripping people off, they are just fat assholes, right? But, their profit margin is a consistent 25% or so. Great margin, but nowhere near what it could be if producing software really had no marginal costs. (I know you meant the cost of putting something up on a site to be downloaded or on disc, but that is really trivial and really is worth nothing).

    Microsoft and Oracle SPEND 75% of their revenues on something. And it’s not all cafeterias and Ballmer’s salary. IT COSTS MONEY TO BUILD SOFTWARE, and, importantly, THE BUILDING NEVER STOPS. Because if you think that after you invested in coding something, marketing it, supporting it, you can kick back and just let the money roll in while you fire your engineers and have no marginal costs, you have a revelation coming if you ever try to run a software company.

    If you really call something your “final version”, your software will and should become free. In the software business, everything you do, everything you come up with, everything that is “hot” becomes old, worn out, and “cold” in about nine months. You have to keep moving, and keep spending money, and therefore need revenues to keep alive — VC’s can only get you so far.

  • Matt

    Glenn, your post reminded me of two things:
    * an amusing spoof from a few years back http://www.philwainewright.com/ebiz/mscn2000-03-27.html
    * the only piece of dialogue I remember clearly from Bedazzled, in which Dudley Moore learns who really invented advertising.
    In short, I welcome the Return of Software! (But, for the record, I’m not recommending the movie.)

  • http://www.mortgagesunzipped.com David G from Zillow.com

    Hey Glenn,

    Can you please correct your comment about limiting photo’s? Zillow.com displays more than 3X the number of photo’s Redfin does and our site is ad supported. Thanks!

    Just FYI; the ad game is also evolving to meet the changing marketplace. You seem to imagine a world without advertising and that may be how it ends up feeling to users but ads of one type or another are and will probably remain the primary revenue stream for online publishers for the next decade (unless of course you take the stance that “everyone’s a publisher” but I’m talking about net-native business models here.)

    IMO, fb (and twitter) are neither media site nor web application. Zuckerberg says it best when he defines his site as a “social utility.” These sites are the PSE of the internet and trying to be a media site is what kills them (I’m talking to you, myspace.) I wouldn’t be surprised if the true utilities like fb, youtube, twitter ultimately found a way to get their revenue directly from the ISP’s.

  • http://blog.redfin.com Glenn Kelman

    Good bust David, when I wrote that I had in mind other ad-driven real estate sites as you can well imagine, but I have clarified the post to indicate that there are exceptions when it comes to photos. But if we are trying to get it right, I don’t think it’s accurate either to say that you display three times the photos for most or even many listings. Overwhelmingly we seem to display the same number of photos.

    Would you agree that it’s generally fair to say that Redfin and some of your other broker partners display more information about the listing than you do, and that the main reason for this is that your business model is designed to complement the sites of those broker-partners? For example, the price history and a full set of amenities is displayed on Redfin’s site and I assume you don’t display that out of respect for the brokers?

    Regarding whether I imagine “a world without advertising” I don’t think I am that dull! I must not have written the post clearly but the post does conclude by saying: “This is not to say that you can’t build beautiful ad-driven sites, or that you can’t make money from those sites. The web is by far the world’s most powerful advertising medium.” I fully expect ad dollars to shift to the Web, and for the ad-driven model to continue growing. I just hope that the downturn creates room for other models.

    And regarding Facebook as a utility, in introducing Facebook into the essay, I began by quoting Facebook’s description of itself as a social utility, which to me is a form of an application. And generally, I argue that Facebook should charge like a utility. So I think we agree there, too.

    I am embarrassed to say though that I don’t know what PSE means. What does it stand for?

  • nobody

    “For most ad-driven websites, the goal isn’t necessarily to engage an audience in the completion of any particular task so much as to redirect it toward a purchase on an advertiser’s site.”

    Great observation. So why are you a fan of BuddyTV then? I poked around the site a bit, and they fit your description exactly.

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  • Greg Paskill

    I loved the above observation of you get what you pay for, as a counter-argument to “the best things in life are free.”

    Some of my other favorite pairings include:
    1A – 2 heads are better than 1.
    1B – If you want something right, do it yourself.

    2A – Don’t judge a book by its cover.
    2B – Image is everything.

  • jt

    Redfin is the scientology of real estate!

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