The Quid Pro Quo In Practice

by on September 9, 2009 · 11 comments

My PFF colleagues Berin Szoka and Adam Thierer have written many times about the quid pro quo by which advertising supports free online content and services: somebody must pay for all the supposedly “free” content on the Internet. There is no free lunch!

Here are two two recent examples I came across of the quid pro quo being made very apparent to users.

Hulu error message

Hulu. Traditionally, broadcast media has been a “two-sided” market: Broadcasters give away content to attract audiences, and broadcasters “sell” that audience to advertisers. The same is true for Internet video. But watching Hulu over the weekend, I noticed something interesting: Adblock Plus blocked the occasional Hulu ad but every time it did so, I was treated to 30 seconds of a black screen (instead of the normal 15 second ad) showing a message from Hulu reminding me that “Hulu’s advertising partners allow [them] to provide a free viewing experience” and suggesting that I “Confirm all ad-blocking software has been fully disabled.”

Although I use AdBlock on many newspaper websites (because I just can’t focus on the articles with flashing ads next to the text), I would much rather watch a 15-second ad than wait 30 seconds for my show to resume. I think most users would feel the same way. We get annoyed by TV ads because they take up so much of our time. If Wikipedia is to be believed, there’s now an average of 9 minutes of advertisements per half-hour of television. That’s double the amount of advertising that was shown in the 1960s.

But online services such as Hulu show an average of just 37 seconds of advertising per episode. Amazingly, some shows garner ad rates 2-3 times higher than on prime-time television. Why might ad rates for online shows be higher? Because:

  1. When a show has only 15 seconds of ads, you’re less likely to turn away from the screen to do something else;
  2. Advertisers are more certain that viewers are watching their ads (as opposed to changing the channel or skipping over it with a DVR); and
  3. Online viewers are twice as likely to remember a commercial they’ve seen on Hulu as one they’ve seen on television-at least in part because of factors 1 and 2, and perhaps because Internet video ads might be more effective in other ways.

As for me, I’ve reconfigured Adblock Plus to not block ads on Hulu. But even if users like me don’t block video ads on sites like Hulu, they may not be able to generate enough revenue to survive. Traditional media providers might be willing to cross-subsidize experiments in online video distribution for a while from offline revenue streams, but at some point, either online video will have to produce comparable revenue or the quality of content will deteriorate notably in the gradual shift to online distribution.

The problem is that, even if online video services can sell ad time for 3 times as much as broadcasters, because there is almost 15 times as much ad time on broadcast television than online services, the online service will still earn only 1/5 as much revenue as a traditional broadcaster. This is why online video is expected to drive adoption of personalized (or “behaviorally targeted”) advertising: If online video programmers can target advertising to the individual user’s likely interest, rather than to a crude profile of their likely audience, they can generate much higher revenue per ad because advertisers won’t be wasting their ad budgets showing users ads for things they aren’t interested in! The increased revenue for online content providers made possible by targeted advertising is the “mother’s milk” that many websites need to survive.

Google Maps. On 8/25, Google announced that it had updated Google Maps for mobile to periodically report the user’s location (based on the GPS chip in their device) back to Google. But before you reach for your tinfoil hats and start shouting about conspiracy theories, let me explain why this “tracking” is actually fantastic news for users:

  1. Google uses the reported location (and speed) information to assess traffic conditions in real-time. This traffic information is then shared with other Google Maps users in near-real-time-everyone benefits! If only a few people participated, the data would not be very helpful. But when lots of people participate, the data is more accurate and available for more roads than would otherwise be possible.
  2. It’s completely optional and users are fully informed of what the software is doing.
  3. People who do not want their location tracked can opt-out at no cost-and they get to keep using Google Maps for free.

Conclusion

In the Hulu example, the basic quid pro quo for getting all that free video programming is watching a few ads. It’s possible for people to block the ads, but then they’ll waste even more time looking at a black screen. That basic quid pro quo might prove insufficient to support the quality and quantity of video programming users want online, but without at least the basic quid pro quo of not blocking ads, video programming won’t get past stage one.

In the Google Maps example, the quid pro quo for getting traffic data is sharing your location with Google. Users can still get the traffic data without sharing their location, but if everyone did that, there would be no traffic data. This highlights the problem of free-riding created by the no-cost opt-out: It’s still possible to be a freeloader with both services, but if everyone did that, these services simply wouldn’t survive.

  • quanticle

    Of course, it might not matter that the online service only earns 1/5th as much as the broadcast network. From what I've seen, the overhead of running an online service (such as Hulu) is much less than that of running a traditional broadcast network. Therefore, the profit margin might be the same, even though the revenue is much less.

  • I hate ads

    I watched one show on Hulu, all 3 seasons of it a while back. Apparently the target demographic for that show is 20-30 year old men, because they had a really really stupid ad for some male beauty product, but it used scantily clad women in it, obviously.

    I'd have much rather sat thru 30 seconds of silence than that.

    But I'm willing to do the Google maps thing. I'll look into it, and opt in.

  • http://techliberation.com/author/berinszoka/ Berin Szoka

    That may be true, quanticle, but how much of the total cost of bringing programming to the consumer actually lies in the distribution platform (Hulu v. cable)? For instance, if Hulu costs 1/2 as much as cable, but distribution accounts for only 40% of total costs, Hulu's cost advantage would only bring down total programming costs by 20%–leaving Hulu with a net revenue shortfall of 60% (100% – 20% cost savings – 20% as much revenue).

    I'd love to know what the actual numbers look like, but I think you take my point. Right now, online programming is being subsidized by offline distribution. As more people “Cut the video cord,” that's not sustainable. Online video will have to be able to pay for itself.

  • http://techliberation.com/author/berinszoka/ Berin Szoka

    So what you're saying is that you would have preferred an ad that was more relevant to you, rather than simply targeted to the assumed demographic of the audience likely to watch that show? Sounds like you need behaviorally targeted ads!

  • I hate ads

    Perhaps. I read an article on this site that opened my mind to it, if it did not convert me.

    I don't own a tv, don't listen to the radio, haven't been back to hulu since that one show. I use an adblocker on my browser. I occasionally download a free game on my iphone. I delete them if the ads are intrusive. I will even more occasionally, buy the game, if I must have it.

    Basically, I'm not the target demographic for advertisers. The products that need advertising I already don't buy. But, I understand that someone has to pay for innovation. I'm curious to see what happens, out of idle curiosity rather than passion.

  • I hate ads

    Perhaps. I read an article on this site that opened my mind to it, if it did not convert me.

    I don't own a tv, don't listen to the radio, haven't been back to hulu since that one show. I use an adblocker on my browser. I occasionally download a free game on my iphone. I delete them if the ads are intrusive. I will even more occasionally, buy the game, if I must have it.

    Basically, I'm not the target demographic for advertisers. The products that need advertising I already don't buy. But, I understand that someone has to pay for innovation. I'm curious to see what happens, out of idle curiosity rather than passion.

  • I hate ads

    Perhaps. I read an article on this site that opened my mind to it, if it did not convert me.

    I don't own a tv, don't listen to the radio, haven't been back to hulu since that one show. I use an adblocker on my browser. I occasionally download a free game on my iphone. I delete them if the ads are intrusive. I will even more occasionally, buy the game, if I must have it.

    Basically, I'm not the target demographic for advertisers. The products that need advertising I already don't buy. But, I understand that someone has to pay for innovation. I'm curious to see what happens, out of idle curiosity rather than passion.

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