November 22nd, 2005
Ad-supported applications: just say no
I asked several on-demand CEOs for their views on ad-supported applications last week. Everything they said bears out what seems to be the majority opinion of TalkBack posters who’ve been commenting on my posts (1, 2, 3 and 4), John Carroll’s (1 and 2) and ZDNet’s news coverage of the topic (1, 2, 3 and others) over the past week or two.
The first person I asked was 
Zach Nelson, CEO of NetSuite, one of the leading on-demand application vendors. NetSuite targets small and mid-sized businesses with an integrated suite of on-demand business applications. This exactly the type of customer Microsoft is talking about targeting with its promised Office Live! on-demand services. So what does Nelson (pictured) think of the notion of funding these with ads?
"There is no way on God’s earth you can fund business applications with advertising."
No mincing of words there. In fact, Nelson was so astonished at the idea that he’s convinced there must have been some kind of misinformation or misunderstanding of what Bill Gates and Ray Ozzie were supposed to have said. He can’t believe they seriously mean it.
I then asked WebSideStory’s CEO Jeff Lunsford. I’ll be writing more about his company, which offers a suite of website traffic analysis, search, content management and marketing tools, in a separate post later on. Suffice to say here that it’s a leader in its field, posting $34.2 million trailing twelve months (TTM) revenue in its most recent quarter — not a cent of which comes from selling advertising.
But when WebSideStory started out in 1997, its entry-level product was ad-funded, and some low-end players in its field still have ad-funded offerings today. So Lunsford speaks with the benefit of experience.
"We used to give away analytics for three or four years. We changed to subscription because the ad revenues were too volatile," he said, adding that he has no regrets about abandoning the ad-funded model. "There’s not a track record of dramatic success for the ad model. There have been free web analytics ever since we started and we’re still doing OK."
My third conversation was with Subrah Iyar, the CEO, chairman and co-founder of WebEx, which with TTM revenues of $292.4 million is arguably the biggest fish in the pond of on-demand application vendors (bigger even than Salesforce.com, which just reported $273 million TTM).
WebEx is another company I’m going to be writing about in another posting shortly, because it’s currently at an interesting stage in its evolution, adding new services around the core online meetings capability for which it is famed. Ads would completely undermine that service, said Iyar:
"Do you think anybody that’s meeting with their customers wants to have ads on display?" The main reason the ad-funded model doesn’t fly, though, is much more fundamental than that, he continued: "Accountability by the vendor to the customer is going to be critical for business." If there’s no contract, what comeback does the customer have when things go wrong?
That point was amply demonstrated last weekend when Google halted sign-ups and new profiles to its newly introduced traffic analysis service amidst widespread dismay at the delays users were experiencing in accessing their traffic data. No wonder WebSideStory’s Lunsford is unfazed by Google’s introduction of a new free service on his company’s patch. "We don’t think Google’s desire to give away this solution really impacts things," he told me. "There are dramatic differences in the depth of [the two] product[s]."
The fact is, there’s no such thing as a free lunch, or a free application — not even on the Web. Maybe the ad-funded model is good enough for certain low-end, content-centric consumer applications. But any business or professional user looking for a serious, functional application is savvy enough to know that you get what you pay for, and if you don’t pay for it, you’ll never be able to rely on it. Don’t give into the temptation: it’s just not worth it.
Phil Wainewright is a commentator and strategist on emerging software industry trends. See his full profile and disclosure of his industry affiliations.
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